-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VN4atZgjFDrx6VKX4DLvoOmUddANLjMefluC0PpIKnuPsofpPTrjdh269MZI2fEE /CatP3+A7PglktvEqWif3g== 0000894671-98-000003.txt : 19980401 0000894671-98-000003.hdr.sgml : 19980401 ACCESSION NUMBER: 0000894671-98-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: OHIO VALLEY BANC CORP CENTRAL INDEX KEY: 0000894671 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 311359191 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20914 FILM NUMBER: 98581803 BUSINESS ADDRESS: STREET 1: 420 THIRD AVE CITY: GALLIPOLIS STATE: OH ZIP: 45631 BUSINESS PHONE: 6144462631 10-K 1 ANNUAL REPORT ON FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: DECEMBER 31, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period ended:___________________ Commission file number: 0-20914 Ohio Valley Banc Corp. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Ohio --------------------------------------------- (State or other jurisdiction or organization) 31-1359191 --------------------------------------- (I.R.S. Employer Identification Number) 420 Third Avenue, Gallipolis, Ohio 45631 --------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (614) 446-2631 Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Common Shares, Without Par Value -------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S - K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 28, 1998: $ 54,122,564 The number of common shares of the registrant outstanding as of February 28,1998: 1,811,775 common shares. Exhibit Index begins on page 18. Page 1 of 78 pages. Ohio Valley Banc Corp. Form l0-K December 31, 1997 DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the 1997 Annual Report to Shareholders of Ohio Valley Banc Corp. (Exhibit 13) are incorporated by reference into Part I, Item 1 and Part II, Items 5, 6, 7 and 8. (2) Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held April 8, 1998 are incorporated by reference into Part III, Items 10, 11, 12 and 13. Contents of Form 10-K PART I Item 1 Business 3 Item 2 Properties 12 Item 3 Legal Proceedings 12 Item 4 Submission of Matters to a Vote of Security Holders 12 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 14 Item 6 Selected Financial Data 14 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 7A Quantitative and Qualitative Disclosures about Market Risk 15 Item 8 Financial Statements and Supplementary Data 15 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 15 PART III Item 10 Directors and Executive Officers of the Registrant 15 Item 11 Executive Compensation 15 Item 12 Security Ownership of Certain Beneficial Owners and Management 16 Item 13 Certain Relationships and Related Transactions 16 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 16 SIGNATURES 17 EXHIBIT INDEX 18 Page 2 PART I ITEM 1 - BUSINESS General Description of Business Ohio Valley Banc Corp. (Registrant) was incorporated under the laws of the State of Ohio on January 8, 1992. The Registrant is registered under the Bank Holding Company Act of 1956, as amended (BHC Act). A substantial portion of the Registrant's revenue is derived from cash dividends paid by The Ohio Valley Bank Company, the Registrant's wholly-owned subsidiary (the "Bank"). The principal executive offices of the Registrant are located at 420 Third Avenue, Gallipolis, Ohio 45631. The Bank was organized on September 24, 1872, under the laws governing private banking in Ohio. The Bank was incorporated in accordance with the general corporation laws governing savings and loan associations of the State of Ohio on January 8, 1901. The Articles of Incorporation of the Bank were amended on January 25, 1935, for the purpose of authorizing the Bank to transact a commercial savings bank and safe deposit business and again on January 26, 1950, for the purpose of adding special plan banking. The Bank was approved for trust powers in 1980 with trust services first being offered in 1981. The Bank's deposits are insured by the Federal Deposit Insurance Corporation (FDIC). The Registrant's wholly-owned subsidiary, Loan Central, Inc. (Loan Central), was formed on February 1, 1996. Loan Central was incorporated under the Ohio laws governing finance companies. The Bank is engaged in commercial and retail banking and Loan Central is engaged in consumer finance. Reference is hereby made to Item 1 (E), "Statistical Disclosure" and Item 8 of this Form 10-K for financial information pertaining to the Registrant's business through its subsidiaries. Description of Ohio Valley Banc Corp.'s Business The Registrant's business is incident to its 100% ownership of the outstanding stock of the Bank and Loan Central. The Bank is a full-service financial institution offering a blend of commercial, retail and agricultural banking services. Loans of all types and checking, savings and time deposits are offered, along with such services as safe deposit boxes, issuance of travelers' checks and administration of trusts. Loan Central, a consumer finance company, offers smaller balance consumer loans to individuals with nonconforming or nontraditional credit history. Revenues from loans accounted for 80.66% in 1997, 79.81% in 1996 and 74.50% in 1995 of total consolidated revenues. Revenues from interest and dividends on securities accounted for 13.56%, 15.21% and 20.58% of total consolidated revenues in 1997, 1996 and 1995, respectively. The Bank presently has nine offices, six of which offer drive-up services and automatic teller machines. The Bank accounted for substantially all of the Registrant's consolidated assets at December 31, 1997. The banking business is highly competitive. The Bank's market area is concentrated primarily in Gallia, Jackson, Pike and Franklin Counties in Ohio and Mason County, West Virginia. Some additional business originates from the surrounding Ohio counties of Meigs, Vinton, Scioto and Ross. Competition for deposits and loans comes primarily from local banks and savings associations, although some competition is also experienced from local credit unions, insurance companies and mutual funds. In addition, larger regional institutions, Page 3 PART I (continued) with substantially greater resources, are becoming increasingly visible. With the formation of Loan Central, the Registrant is better able to compete in Gallia County by serving a consumer base which may not meet the Bank's credit standards. Loan Central also operates in Lawrence County which is outside the Bank's primary market area. The principal methods of competition are the rates of interest charged for loans, the rates of interest paid for deposits, the fees charged for services and the availability and quality of service. The business of the Registrant and its subsidiaries is not seasonal, nor is it dependent upon a single or small group of customers. The Bank deals with a wide cross-section of businesses and corporations which are located primarily in southeastern Ohio. Few loans are made to borrowers outside this area. Lending decisions are made in accordance with written loan policies designed to maintain loan quality. The Bank originates commercial loans, commercial leases, residential real estate loans, home equity lines of credit, installment loans and credit card loans. The Bank believes that there is no significant concentration of loans to borrowers engaged in the same or similar industries and does not have any loans to foreign entities. Commercial lending entails significant risks as compared with consumer lending - - i.e., single-family residential mortgage lending, installment lending and credit card loans. In addition, the payment experience on commercial loans is typically dependent on adequate cash flows in order to evaluate whether anticipated future cash flows will be adequate to service both interest and principal due. Thus, commercial loans may be subject, to a greater extent, to adverse conditions in the economy generally or adverse conditions in a specific industry. The Registrant's subsidiaries make installment credit available to customers and prospective customers in their primary market area of southeastern Ohio. Credit approval for consumer loans requires demonstration of sufficiency of income to repay principal and interest due, stability of employment, a positive credit record and sufficient collateral for secured loans. It is the policy of the subsidiaries to adhere strictly to all laws and regulations governing consumer lending. A qualified compliance officer is responsible for monitoring the performance of their respective consumer portfolio and updating loan personnel. The Registrant's subsidiaries make credit life insurance and health and accident insurance available to all qualified buyers thus reducing their risk of loss when a borrower's income is terminated or interrupted. The Registrant's subsidiaries review their respective consumer loan portfolios monthly to charge off loans which do not meet that subsidiary's standards. Credit card accounts are administered in accordance with the same standards as applied to other consumer loans. Consumer loans generally involve more risk as to collectibility than mortgage loans because of the type and nature of collateral and, in certain instances, the absence of collateral. As a result, consumer lending collections are dependent upon the borrower's continued financial stability, and thus are more likely to be adversely affected by job loss, divorce or personal bankruptcy and by adverse economic conditions. The market area for real estate lending by the Bank is also located in southeastern Ohio. The Bank generally requires that the loan amount with respect to residential real estate loans be no more than 89% of the purchase price or the appraisal value of the real estate securing the loan, unless private mortgage insurance is obtained by the borrower for the percentage exceeding 89%. These loans are generally one year adjustable or fixed for the first three or five years and then become one year adjustable, fully amortized mortgages. The Bank is currently not originating mortgages for the secondary market. Real estate loans are secured by first mortgages with evidence of title in favor of the Bank in the form of an attorney's opinion of title or a title insurance policy. The Bank also requires proof of hazard insurance with the Bank named as the mortgagee and as loss payee. Home equity lines of credit are generally made as second mortgages by the Bank. The home equity lines of credit are written with ten year terms but are reviewed annually. A variable interest rate is generally charged on the home equity lines of credit. Page 4 PART I (continued) The Bank expanded its operations in December 1996 by introducing a supermarket branch in the Bank's existing market area of Gallia County to further enhance the Bank's customer service through extended hours and convenience. In January 1997, another branch was opened in Columbus, Ohio (Franklin County) which represents a new market for the Bank. The Bank also converted its loan origination office in Point Pleasant, West Virginia to a full-service branch providing greater access to its current and future customers. The Bank expects to continue this growth in 1998 by introducing a second SuperBank branch to be located in a local Wal-Mart store in Gallipolis. To expand on Loan Central's success, a third office was opened in Jackson, Ohio in early 1998. Supervision and Regulation The following is a summary of certain statutes and regulations affecting the Registrant and the Bank. The summary is qualified in its entirety by reference to such statutes and regulations. The Registrant is a bank holding company under the BHC Act, which restricts the activities of the Registrant and the acquisition by the Registrant of voting shares or assets of any bank, savings association or other company. The Registrant is also subject to the reporting requirements of, and examination and regulation by, the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act on transactions with affiliates, including any loans or extensions of credit to the bank holding company or any of its subsidiaries, investments in the stock or other securities thereof and the taking of such stock or securities as collateral for loans or extensions of credit to any borrower; the issuance of guarantees, acceptances or letters of credit on behalf of the bank holding company and its subsidiaries; purchases or sales of securities or other assets; and the payment of money or furnishing of services to the bank holding company and other subsidiaries. Bank holding companies are prohibited from acquiring direct or indirect control of more than 5% of any class of voting stock or substantially all of the assets of any bank holding company without the prior approval of the Federal Reserve Board. A bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with extensions of credit and/or the provision of other property or services to a customer by the bank holding company or its subsidiaries. As an Ohio state-chartered bank, the Bank is supervised and regulated by the Ohio Division of Financial Institutions. The deposits of the Bank are insured by the FDIC and the Bank is subject to the applicable provisions of the Federal Deposit Insurance Act. In addition, the holding company of any insured financial institution that submits a capital plan under the federal banking agencies' regulations on prompt corrective action guarantees a portion of the institution's capital shortfall, as discussed below. Various requirements and restrictions under the laws of the United States and the State of Ohio affect the operations of the Bank including requirements to maintain reserves against deposits, restrictions on the nature and amount of loans which may be made and the interest that may be charged thereon, restrictions relating to investments and other activities, limitations on credit exposure to correspondent banks, limitations on activities based on capital and surplus, limitations on payment of dividends, and limitations on branching. Since June 1997, pursuant to federal legislation, the Bank has been authorized to branch across state lines, unless the law of the other state specifically prohibits the interstate branching authority granted by federal law. Page 5 PART I (continued) The Federal Reserve Board has adopted risk-based capital guidelines for bank holding companies and for state member banks. The risk-based capital guidelines include both a definition of capital and a framework for calculating weighted risk assets by assigning assets and off-balance sheet items to broad risk categories. The minimum ratio of capital to weighted risk assets (including certain off-balance sheet items, such as standby letters of credit) is 8%. At least 4.0 percentage points is to be comprised of common stockholders' equity (including retained earnings but excluding treasury stock), noncumulative perpetual preferred stock, a limited amount of cumulative perpetual preferred stock, and minority interests in equity accounts of consolidated subsidiaries, less goodwill and certain other intangible assets ("Tier 1 capital"). The remainder ("Tier 2 capital") may consist, among other things, of mandatory convertible debt securities, a limited amount of subordinated debt, other preferred stock and a limited amount of allowance for loan and lease losses. The Federal Reserve Board also imposes a minimum leverage ratio (Tier 1 capital to total assets) of 3% for bank holding companies and state member banks that meet certain specified conditions, including no operational, financial or supervisory deficiencies, and including having the highest regulatory rating. The minimum leverage ratio is 100 - 200 basis points higher for other bank holding companies and state member banks based on their particular circumstances and risk profiles and those experiencing or anticipating significant growth. State non-member banks, such as the Bank, are subject to similar capital requirements adopted by the FDIC. The Registrant and the Bank currently satisfy all capital requirements. Failure to meet applicable capital guidelines could subject a banking institution to a variety of enforcement remedies available to federal and state regulatory authorities, including the termination of deposit insurance by the FDIC. The federal banking regulators have established regulations governing prompt corrective action to resolve capital deficient banks. Under these regulations, institutions which become undercapitalized become subject to mandatory regulatory scrutiny and limitations, which increase as capital continues to decrease. Such institutions are also required to file capital plans with their primary federal regulator, and their holding companies must guarantee the capital shortfall up to 5% of the assets of the capital deficient institution at the time it becomes undercapitalized. The ability of a bank holding company to obtain funds for the payment of dividends and for other cash requirements is largely dependent on the amount of dividends which may be declared by its subsidiary banks and other subsidiaries. However, the Federal Reserve Board expects the Registrant to serve as a source of strength to the Bank, which may require it to retain capital for further investments in the Bank, rather than for dividends for shareholders of the Registrant. The Bank may not pay dividends to the Registrant if, after paying such dividends, it would fail to meet the required minimum levels under the risk-based capital guidelines and the minimum leverage ratio requirements. The Bank must have the approval of its regulatory authorities if a dividend in any year would cause the total dividends for that year to exceed the sum of the current year's net profits and the retained net profits for the preceding two years, less required transfers to surplus. Payment of dividends by the Bank may be restricted at any time at the discretion of the regulatory authorities, if they deem such dividends to constitute an unsafe and/or unsound banking practice or if necessary to maintain adequate capital for the Bank. These provisions could have the effect of limiting the Registrant's ability to pay dividends on its outstanding common shares. Page 6 PART I (continued) Deposit Insurance Assessments and Recent Legislation The FDIC is authorized to establish separate annual assessment rates for deposit insurance for members of the Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF"). The Bank is a member of the BIF. The FDIC may increase assessment rates for either fund if necessary to restore the fund's ratio of reserves to insured deposits to its target level within a reasonable time and may decrease such rates if such target level has been met. The FDIC has established a risk-based assessment system for both BIF and SAIF members. Under this system, assessments vary based on the risk the institution poses to its deposit insurance fund. The risk level is determined based on the institution's capital level and the FDIC's level of supervisory concern about the institution. Because BIF become fully funded, BIF assessments for healthy commercial banks were reduced to $0 per year, during 1997. Federal legislation, which became effective September 30, 1996, provides, among other things, for the costs of prior thrift failures to be shared by both the SAIF and the BIF. As a result of such cost sharing, BIF assessments for healthy banks during 1998 will be $.013 per $100 in deposits. Based upon its level of deposits at December 31, 1997, the projected BIF assessments for the Bank would be $37,427 for 1998. Monetary Policy and Economic Conditions The business of commercial banks is affected not only by general economic conditions, but also by the policies of various governmental regulatory authorities, including the Federal Reserve Board. The Federal Reserve Board regulates the money and credit conditions and interest rates in order to influence general economic conditions primarily through open market operations in U.S. Government securities, changes in the discount rate on bank borrowings and changes in reserve requirements against bank deposits. These policies and regulations significantly influence the amount of bank loans and deposits and the interest rates charged and paid thereon, and thus have an effect on earnings. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of commercial banks in the past and are expected to have significant effects in the future. In view of the changing conditions in the economy and the money market and the activities of monetary and fiscal authorities, no definitive predictions can be made as to future changes in interest rates, credit availability or deposit levels. Other Information Management anticipates no material effect upon the capital expenditures, earnings and competitive position of the Registrant or its subsidiaries by reason of any laws regulating or protecting the environment. The Registrant believes that the nature of the operations of the Bank has little, if any, environmental impact. The Registrant, therefore, anticipates no material capital expenditures for environmental control facilities in its current fiscal year or for the forseeable future. The Bank may be required to make capital expenditures related to properties which it may acquire through foreclosure proceedings in the future; however, the amount of such capital expenditures, if any, is not currently determinable. Neither the Registrant nor its subsidiaries have any material patents, trademarks, licenses, franchises or concessions. No material amounts have been spent on research activities and no employees are engaged full time in research activities. As of December 31, 1997, the Registrant and its subsidiaries employed 212 persons full-time and 18 persons part-time. Management considers its relationship with its employees to be good. Financial Information About Foreign and Domestic Operations and Export Sales The Registrant's subsidiaries do not have any offices located in a foreign country and they have no foreign assets, liabilities, or related income and expense. Page 7 PART I (continued) Statistical Disclosure The following section contains certain financial disclosures related to the Registrant as required under the Securities and Exchange Commission's Industry Guide 3, "Statistical Disclosure by Bank Holding Companies", or a specific reference as to the location of the required disclosure in the Registrant's 1997 Annual Report to Shareholders, page 9 and pages 31-43, which are hereby incorporated herein by reference. Ohio Valley Banc Corp. Statistical Information I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL A. & B. The average balance sheet information and the related analysis of net interest earnings for the years ending December 31, 1997, 1996 and 1995 are included in Table I - "Consolidated Average Balance Sheet & Analysis of Net Interest Income", within Management's Discussion and Analysis of Operations found on page 39 of the Registrant's 1997 Annual Report to Shareholders and is incorporated into this Item 1 by reference. C. Tables setting forth the effect of volume and rate changes on interest income and expense for the years ended December 31, 1997 and 1996 are included in Table II - "Rate Volume Analysis of Changes in Interest Income & Expense", within Management's Discussion and Analysis of Operations found on page 40 of the Registrant's 1997 Annual Report to Shareholders and is incorporated into this Item 1 by reference. For purposes of these Tables, changes in interest due to volume and rate were determined as follows: Volume Variance - Change in volume multiplied by the previous year's rate. Rate Variance - Change in rate multiplied by the previous year's volume. Rate / Volume Variance - Change in volume multiplied by the change in rate. II. SECURITIES A. Types of Securities - Total securities on the balance sheet are comprised of the following classifications at December 31: (dollars in thousands) 1997 1996 1995 ---------------------- ---- ---- ---- Securities Available-for-Sale U.S. Treasury securities $27,446 $28,467 $31,171 U.S. Government agency securities 2,062 Equity Securities 3,151 2,125 2,231 ------- ------- ------- Total securities available-for-sale $32,659 $30,592 $33,402 ======= ======= ======= Securities Held-to-Maturity U.S. Government agency securities $24,509 $22,441 34,935 Obligations of states and political subdivisions 13,935 12,252 12,280 Corporate obligations 503 758 1,512 Mortgage-backed securities 472 546 623 ------- ------- ------- Total securities held-to-maturity $39,419 $35,997 $49,350 ======= ======= ======= Page 8 PART I (continued) Ohio Valley Banc Corp. Statistical Information B. Information required by this item is included in Table III-"Securities", within Management's Discussion and Analysis of Operations found on page 41 of the Registrant's 1997 Annual Report to Shareholders and is incorporated into this Item 1 by reference. C. Excluding obligations of the U.S. Treasury and other agencies and corporations of the U.S. Government, no concentration of securities exists of any issuer that is greater than 10% of shareholders' equity of the Registrant. III. LOAN PORTFOLIO A. Types of Loans - Total loans on the balance sheet are comprised of the following classifications at December 31: (dollars in thousands) 1997 1996 1995 1994 1993 - ---------------------- ---- ---- ---- ---- ---- Real estate loans $110,247 $102,158 $ 96,412 $ 86,792 $ 75,249 Commercial loans 78,124 74,666 52,361 55,899 51,754 Consumer loans 78,840 74,908 66,784 55,675 54,567 All other loans 2,568 2,312 1,200 1,954 3,552 -------- -------- -------- -------- -------- $269,779 $254,044 $216,757 $200,320 $185,122 ======== ======== ======== ======== ======== B. Maturities and Sensitivities of Loans to Changes in Interest Rates - Information required by this item is included in Table VII - "Maturity and Repricing Data of Loans", within Management's Discussion and Analysis of Operations found on page 42 of the Registrant's 1997 Annual Report to Shareholders and is incorporated into this Item 1 by reference. C. 1. Risk Elements - Information required by this item is included in Table VI - "Summary of Nonperforming and Past Due Loans", within Management's Discussion and Analysis of Operations found on page 42 of the Registrant's 1997 Annual Report to Shareholders and is incorporated into this Item 1 by reference. 2. Potential Problem Loans - At December 31, 1997, there are approximately $200,000 of loans, which are not included in Table VI - "Summary of Nonperforming and Past Due Loans" within Management's Discussion and Analysis of Operations found on page 42 of the Registrant's 1997 Annual Report to Shareholders, for which management has some doubt as to the borrowers' ability to comply with the present repayment terms. These loans and their potential loss exposure have been considered in management's analysis of the adequacy of the allowance for loan losses. 3. Foreign Outstandings - There were no foreign outstandings at December 31, 1997, 1996, or 1995. 4. Loan Concentrations - As of December 31, 1997, there were no concentrations of loans greater than 10% of total loans which are not otherwise disclosed as a category of loans pursuant to Item III(A) above. Also refer to the Consolidated Financial Statements regarding concentrations of credit found within Note A of the Notes to the Consolidated Financial Statement on page 15 of the Registrant's 1997 Annual Report to Shareholders incorporated herein by reference. Page 9 PART I (continued) Ohio Valley Banc Corp. Statistical Information 5. No material amount of loans that have been classified by regulatory examiners as loss, substandard, doubtful, or special mention have been excluded from the amounts disclosed as impaired, nonaccrual, past due 90 days or more, restructured, or potential problem loans. D. Other Interest-Bearing Assets - As of December 31, 1997, there were no other interest-bearing assets that would be required to be disclosed under Item III (C) if such assets were loans. At December 31, 1997, other real estate owned totaled $142,000. IV. SUMMARY OF LOAN LOSS EXPERIENCE A. The following schedule presents an analysis of the allowance for loan losses for the years ended December 31: (dollars in thousands) 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Balance, beginning of year $3,080 $2,388 $2,184 $2,013 $1,701 Loans charged-off: Real estate 39 3 28 35 54 Commercial 215 78 182 377 Consumer 961 673 304 263 387 ------ ------ ------ ------ ------ Total loans charged-off 1,215 754 514 298 818 Recoveries of loans: Real estate 1 5 2 Commercial 41 73 57 4 105 Consumer 138 54 47 47 48 ------ ------ ------ ------ ------ Total recoveries of loans 180 127 104 56 155 Net loan charge-offs (1,035) (627) (410) (242) (663) Provision charged to operations 1,245 1,319 614 413 975 ------ ------ ------ ------ ------ Balance, end of year $3,290 $3,080 $2,388 $2,184 $2,013 ====== ====== ====== ====== ====== Ratio of Net Charge-offs to Average Loans - Information required by this item is included in Table V - "Allocation of the Allowance for Loan Losses", within Management's Discussion and Analysis of Operations found on page 42 of the Registrants 1997 Annual Report to Shareholders and is incorporated into this Item 1 by reference. In addition, attention is directed to the caption "Loans" within Management's Discussion and Analysis of Operations on page 35 of the Registrant's 1997 Annual Report to Shareholders and is incorporated into this Item 1 by reference. B. Allocation of the Allowance for Loan Losses - Information required by this item is included in Table V - "Allocation of the Allowance for Loan Losses", within Management's Discussion and Analysis of Operations found on page 42 of the Registrants 1997 Annual Report to Shareholders and is incorporated into this Item 1 by reference. Page 10 PART I (continued) Ohio Valley Banc Corp. Statistical Information V. DEPOSITS A. & B. Deposit Summary - Information required by this item is included in Table I - "Consolidated Average Balance Sheet & Analysis of Net Interest Income", within Management's Discussion and Analysis of Operations found on page 39 of the Registrant's 1997 Annual Report to Shareholders and is incorporated into this Item 1 by reference. C. & E. Foreign Deposits - There were no foreign deposits outstanding at December 31, 1997, 1996, or 1995. D. Schedule of Maturities - Information required by this item is included in Note F - Deposits in the table providing the summary of total time deposits by remaining maturities of the notes to the Consolidated Financial Statements found on page 18 of the Registrant's 1997 Annual Report to Shareholders and is incorporated into this Item 1 by reference. VI. RETURN ON EQUITY AND ASSETS Information required by this section is included in Table IX - "Key Ratios", within Management's Discussion and Analysis of Operations found on page 43 of the Registrant's 1997 Annual Report to Shareholders and is incorporated into this Item 1 by reference. VII. SHORT-TERM BORROWINGS The following schedule is a summary of securities sold under agreements to repurchase at December 31: (dollars in thousands) 1997 1996 1995 - ---------------------- ---- ---- ---- Balance outstanding at period end $12,831 $ 8,714 $ 9,504 Weighted average interest rate at period end 3.95% 3.50% 2.90% Average amount outstanding during year $11,352 $ 9,813 $17,790 Approximate weighted average interest rate during the year 3.83% 3.46% 3.36% Maximum amount outstanding as of any month end $16,768 $12,288 $21,748 Page 11 ITEM 2 - PROPERTIES The Registrant owns no material physical properties except through the Bank. The Bank conducts its operations from its main office building at 420 Third Avenue, in Gallipolis, Ohio 45631. The main office building, Trust/Operations Center and five of the eight branch facilities are owned by the Bank. The Bank has eight branch offices. A summary of these properties are as follows: 1) Mini-Bank Office 437 Fourth Avenue, Gallipolis, OH 45631 2) Jackson Pike Office 3035 State Route 160, Gallipolis, OH 45631 3) Rio Grande Office 416 West College Avenue, Rio Grande, OH 45674 4) Jackson Office 738 East Main Street, Jackson, OH 45640 5) Waverly Office 507 W. Emmitt Avenue, Waverly, OH 45690 6) SuperBank Office 236 Second Avenue, Gallipolis, OH 45631 7) Columbus Office 3700 South High Street, Suite 100, Columbus, OH 43207 8) Point Pleasant Office 328 Viand Street, Point Pleasant, WV 25550 The SuperBank, Columbus and Point Pleasant offices are all leased. The lease term for the SuperBank facility is from December 1, 1996 to November 30, 2001, with an option to renew for an additional five years. The base rent is $8,900 per year. The lease term for the Columbus facility is from July 14, 1996 to July 13, 1999, with a base rent of $8,010 per year. The Point Pleasant location has a lease term from July 1, 1997 to June 30, 2017, with a base rent of $30,000 per year. The Bank leases a facility at 429 Viand Street, Point Pleasant, West Virginia, 25550, that was used as a loan production office until being converted to a temporary full-service branch in 1997. The lease will expire on December 31, 1998 and will not be renewed due to the completion of the new office in Point Pleasant. The Bank owns a facility at 143 Third Avenue, Gallipolis, Ohio used for additional office space. The Bank also owns a facility at 441 Second Avenue, Gallipolis, Ohio, which it leases to The Ohio Company, whose principal place of business is 155 East Broad Street, Columbus, Ohio 43215. The primary lease term is from July 1, 1997 to June 30, 2002, with a base rent of $13,800 per year. Loan Central leases three facilities used as consumer finance offices with one facility being located at 266 Upper River Road, Gallipolis, Ohio; a second facility being located at 367 County Road 406, Building #6, South Point, Ohio 45686; and the third facility being located at 323 East Broadway Street, Jackson, Ohio 45640. The lease term for the Gallipolis office is from February 1, 1997 to February 1, 1999 with a base rent of $8,400. The lease term for the South Point office is from February 1, 1996 to February 1, 1999. The base rent is $13,500 for the first year, $14,625 for the second year and $15,750 for the third year. The Jackson office has a lease term from January 22, 1998 to January 21, 2001 with a base rent of $9,600 per year. Management considers its properties to be satisfactory for its current operations. ITEM 3 - LEGAL PROCEEDINGS There are no material pending legal proceedings against the Registrant or its subsidiaries, other than ordinary litigation incidental to their respective businesses. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There was no matter submitted during the fourth quarter of 1997 to a vote of security holders, by solicitation of proxies or otherwise. Page 12 PART I (continued) EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item with respect to Executive Officers who are directors is incorporated by reference to the information appearing under the caption "Election of Directors" on page 4 of the Registrants 1998 Proxy Statement. Executive officers not required to be disclosed in the Proxy Statement are presented in the table below. Executive officers serve at the pleasure of the Board of Directors. Officer of the Officer of the Name Age Bank Since Registrant Since ---- --- ---------- ---------------- Wendell B. Thomas 63 1962 1995 Principal Occupation: Vice President and Secretary of the Registrant beginning 1995, Senior Vice President and Secretary of the Bank beginning 1995, Vice President and Senior Loan Officer of the Bank from 1992 to 1994. Sue Ann Bostic 56 1990 1996 Principal Occupation: Vice President of the Registrant beginning 1996, Senior Vice President, Administrative Group of the Bank beginning 1996, Vice President, Support Services Division of the Bank from 1993 to 1995, Assistant Vice President for Retail Marketing Services in 1992. Michael D. Francis 40 1990 1995 Principal Occupation: Vice President of the Registrant beginning 1995, Senior Vice President of Loan Central beginning 1995, Vice President, Loan Administration, of the Bank from 1993 to 1994, Assistant Vice President and Loan Administration and Compliance Officer of the Bank in 1992. Katrinka V. Hart 39 1985 1995 Principal Occupation: Vice President of the Registrant beginning 1995, Senior Vice President, Retail Bank Group of the Bank beginning 1995, Vice President, Branch Administration Division of the Bank from 1993 to 1994, Assistant Vice President and Manager of Installment Lending, and Branch Administration Officer of the Bank in 1992. Charles C. Lanham 69 1997 1997 Principal Occupation: Senior Vice President of the Registrant beginning 1997, Executive Vice President of the Bank beginning 1997. Mario P. Liberatore 52 1997 1997 Principal Occupation: Vice President of the Registrant beginning 1997, Senior Vice President, West Virginia Bank Group of the Bank beginning 1997. Page 13 PART I (continued) EXECUTIVE OFFICERS OF THE REGISTRANT (continued) E. Richard Mahan 52 1991 1995 Principal Occupation: Vice President of the Registrant beginning 1995, Senior Vice President, Commercial Bank Group of the Bank beginning 1995, Vice President, Lending Division of the Bank from 1993 to 1994, Assistant Vice President and Manager Secured Commercial Lending of the Bank in 1992. Larry E. Miller, II 33 1991 1995 Principal Occupation: Vice President of the Registrant beginning 1995, Senior Vice President, Financial Bank Group of the Bank beginning 1995, Vice President and Internal Auditor of the Bank from 1993 to 1994, Assistant Vice President and Internal Auditor of the Bank in 1992. PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required under this item is located under the caption "Summary of Common Stock Data" on page 30 of the Registrant's 1997 Annual Report to Shareholders. In addition, attention is directed to the caption "Capital Resources" within Management's Discussion and Analysis of Operations on page 36 of the Registrant's 1997 Annual Report to Shareholders and to Note N "Regulatory Matters" located on page 24 therein. All such information is incorporated herein by reference. ITEM 6 - SELECTED FINANCIAL DATA The information required under this item is incorporated by reference to the information appearing under the caption "Selected Financial Data" on page 9 of the Registrant's 1997 Annual Report to Shareholders. ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "Management's Discussion and Analysis of Operations" appears on pages 31 through 38 of the Registrant's 1997 Annual Report to Shareholders and is incorporated herein by reference. Page 14 PART II (continued) ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required under this item is included in Table VIII - "Rate Sensitivity Analysis" found on page 43 and the caption "Liquidity and Interest Rate Sensitivity" found on page 37 within Management's Discussion and Analysis of Operations of the Registrant's 1997 Annual Report to Shareholders and is incorporated herein by reference. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Registrant's consolidated financial statements and related notes are listed below and incorporated herein by reference to the 1997 Annual Report to Shareholders, pages 10 through 28. The "Report of Independent Auditors" appears on page 29 and the supplementary "Summarized Quarterly Financial Information" specified by Item 302 of Regulation S-K appears on page 28 of the 1997 Annual Report to Shareholders and are incorporated by reference. Consolidated Statements of Condition as of December 31, 1997 and 1996 Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 Notes to the Consolidated Financial Statements Report of Independent Auditors ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No response required. PART III Information relating to the following items is included in the Registrant's definitive proxy statement for the Annual Meeting of Shareholders to be held April 8, 1998 ("1998 Proxy Statement") filed with the Commission and is incorporated by reference to the pages listed below into this Form l0-K Annual Report, provided, that neither the report on executive compensation nor the performance graph included in the Registrant's definitive proxy statement shall be deemed to be incorporated herein by reference. ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Discussion located at pages 5-6 of 1998 Proxy Statement. See also Part I - "Executive Officers of the Registrant", beginning on page 13 of this Form 10-K. No facts exist which would require disclosure under Item 405 of Regulation S-K. ITEM 11 - EXECUTIVE COMPENSATION Discussion located at pages 7-8 of 1998 Proxy Statement. Page 15 PART III (continued) ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Discussion located at pages 2-4 of 1998 Proxy Statement. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Discussion located at page 10 of 1998 Proxy Statement. PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K A. ( 1 ) Financial Statements -------------------- The following consolidated financial statements of the Registrant appear in the 1997 Annual Report to Shareholders, Exhibit 13, on the pages referenced and are specifically incorporated by reference under Item 8 of this Form 10-K: Consolidated Statements of Condition as of December 31, 1997 and 1996 10 Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995 .................................. 11 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995 ...................... 12 Consolidated Statements of Cash Flows for the Years ended December 31, 1997, 1996 and 1995 .................................. 13 Notes to the Consolidated Financial Statements ...................... 14-28 Report of Independent Auditors ...................................... 29 (2) Financial Statement Schedules Financial statement schedules are omitted as they are not required or are not applicable, or the required information is included in the financial statements. (3) Exhibits Reference is made to the Exhibit Index which is found on page 18 of this Form 10-K. B. Reports on Form 8- K No reports on Form 8-K were filed during the last quarter of the year ended December 31, 1997. Page 16 SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OHIO VALLEY BANC CORP. Date: March 17, 1998 By /s/James L. Dailey ----------------------------- James L. Dailey, Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 17, 1998 by the following persons on behalf of the Registrant and in the capacities indicated. Name Capacity ---- -------- /s/James L. Dailey Chairman, Chief Executive - ----------------------------- Officer and Director James L. Dailey /s/Jeffrey E. Smith President, Chief Operating Officer, - ----------------------------- Treasurer and Director Jeffrey E. Smith /s/Wendell B. Thomas Vice President and - ----------------------------- Secretary Wendell B. Thomas /s/Morris E. Haskins Director - ----------------------------- Morris E. Haskins /s/Keith R. Brandeberry, M.D. Director - ----------------------------- Keith R. Brandeberry, M.D. /s/W. Lowell Call Director - ----------------------------- W. Lowell Call /s/Robert H. Eastman Director - ----------------------------- Robert H. Eastman /s/Merrill L. Evans Director - ----------------------------- Merrill L. Evans /s/Warren F. Sheets Director - ----------------------------- Warren F. Sheets /s/Thomas E. Wiseman Director - ----------------------------- Thomas E. Wiseman Page 17 EXHIBIT INDEX The following exhibits are included in this Form 10-K or are incorporated by reference as noted in the following table: Exhibit Number Exhibit Description 3.(i) Amended Articles of Ohio Valley Banc Corp. (as filed with the Ohio Secretary of State on August 21, 1992) are incorporated herein by reference to Form 8-K (File# 2-71309) [Exhibit 3a] filed November 6, 1992. 3.(i) Certificate of Amendment by Shareholders to the Articles of Incorporation of Ohio Valley Banc Corp. (as filed with the Ohio Secretary of State on April 26, 1996) [Exhibit is being filed herewith.] 3.(i) Amended Articles of Ohio Valley Banc Corp. (reflects amendments through April 26, 1996)[for SEC reporting compliance only -- not filed with Ohio Secretary of State][Exhibit is being filed herewith.] 3b Code of Regulations of the Registrant are incorporated herein by reference to Form 8-K (File # 2-71309) [Exhibit 3b] filed November 6, 1992. 10 Summary of Deferred Compensation Plan for Directors and Executive Officers [Exhibit is being file herewith] 11 Statement regarding computation of per share earnings (included in Note A of the notes to the Consolidated Financial Statements on page 43 of this Annual Report on Form 10-K.) 13 Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1997. [Exhibit is being filed herewith] (Not deemed filed except for portions thereof which are specifically incorporated by reference into this Annual Report on Form 10-K.) 21 Subsidiaries of the Registrant [Exhibit is being filed herewith.] 23a Consent by Certified Public Accountants - Crowe, Chizek and Company LLP. [Exhibit is being herewith.] 27 Financial Data Schedule. [Exhibit is filed herewith.] Page 18 EX-3.(I) 2 AMENDED ARTICLES OF INCORPORATION Exhibit 3.(i) Certificate of Amendment by Shareholders to the Articles of Incorporation of Ohio Valley Banc Corp. (as filed with the Ohio Secretary of State on April 26, 1996) Prescribed by Charter No._______ BOB TAFT, Secretary of State Approved _________ 30 East Broad Street, 14th Floor Date _____________ Columbus, Ohio 43266-0418 Fee ______________ [OBJECT OMITTED] CERTIFICATE OF AMENDMENT BY SHAREHOLDERS TO THE ARTICLES OF INCORPORATION OF Ohio Valley Banc Corp. - -------------------------------------------------------------------------------- (Name of Corporation) James L. Dailey , who is: - -------------------------------------------------------- X Chairman of the Board President Vice President (Please check one.) and Wendell B. Thomas , who is: ---------------------------------------------------- X Secretary Assistant Secretary (Please check one.) of the above named Ohio corporation organized for profit does hereby certify that: (Please check the appropriate box and complete the appropriate statements.) X a meeting of the shareholders was duly called for the purpose of adopting this amendment and held on April 3, 1996 at which meeting a quorum of the shareholders was present in person or by proxy, and by the affirmative vote of the holders of shares entitling them to exercise 83% of the voting power of the corporation. _ in a writing signed by all of the shareholders who would be entitled to notice of a meeting held for that purpose, the following resolution to amend the articles was adopted: To amend Article Fourth of the Amended Articles of The Ohio Valley Banc Corp. to increase the number of authorized common shares from 2,000,000 to 5,000,000. (See attached Resolution). IN WITNESS WHEREOF, the above named officers, acting for and on the behalf of the corporation, have hereto subscribed their names this 5th day of April, 1996. By: /s/ James L. Dailey By: /s/ Wendell B. Thomas ---------------------------- ------------------------------------ (Chairman, President, Vice (Secretary, Assistant Secretary) President NOTE: OHIO LAW DOES NOT PERMIT ONE OFFICER TO SIGN IN TWO CAPACITIES, TWO SEPARATE SIGNATURES ARE REQUIRED, EVEN IF THIS NECESSITATES THE ELECTION OF A SECOND OFFICER BEFORE THE FILING CAN BE MADE. OHIO VALLEY BANC CORP. RESOLUTION REGARDING AMENDMENT TO ARTICLES OF INCORPORATION TO INCREASE AUTHORIZED SHARES WHEREAS, it is deemed to be in the best interests of the Ohio Valley Banc Corp. and its shareholders that the Articles of Incorporation of the Ohio Valley Banc Corp. be amended to provide for an increase in the number of authorized shares of the Ohio Valley Banc Corp. from two million (2,000,000) to five million (5,000,000), all of which shall be common shares, each without par value; and NOW, THEREFORE, BE IT RESOLVED, that the Articles of Incorporation of the Ohio Valley Banc Corp. shall be and are now amended as follows: The reference to "two million (2,000,000)" shall be deleted from Article FOURTH and a reference to "five million (5,000,000)" shall be inserted in place of the deletion so that Article FOURTH shall read: FOURTH: The authorized number of shares of the corporation shall be five million (5,000,000), all of which shall be common shares, each without par value. BE IT FURTHER RESOLVED, that the directors of the corporation shall be and are now authorized and directed to procure the approval of the amendment set forth above by the vote, consent, waiver or release of the holders of the shares entitling such holders to exercise not less than a majority of the voting power of the corporation; BE IT FURTHER RESOLVED, that the Chairman and Secretary of the Ohio Valley Banc Corp. are authorized and directed to sign a certificate setting out the amendment and file the certificate in the office of the Ohio Secretary of State in the form and manner required by applicable statute and to perform any and all other acts necessary to comply with any and all other statutes. Date: January 30, 1996 /s/ James L. Dailey /s/ Wendell B. Thomas - ------------------------- ---------------------------- James L. Dailey, Chairman Wendell B. Thomas, Secretary EX-3.(I) 3 AMENDEDED ARTICLES OF INCORPORATION Exhibit 3.(i) Amended Articles of Ohio Valley Banc Corp. (reflects amendments through April 26, 1996) [for SEC reporting compliance purposes only -- not filed with Ohio Secretary of State] AMENDED ARTICLES OF OHIO VALLEY BANC CORP. (reflects amendments through April 26, 1996) [for SEC reporting compliance purposes only -- not filed with Ohio Secretary of State] FIRST: The name of the corporation shall be Ohio Valley Banc Corp. SECOND: The place in Ohio where the principal office of the corporation is to be located is in the City of Gallipolis, County of Gallia. THIRD: The purpose for which the corporation is formed is to engage in any lawful act or activity for which corporations may be formed under Sections 1701.01 to 1701.98 of the Ohio Revised Code. FOURTH: The authorized number of shares of the corporation shall be five million (5,000,000), all of which shall be common shares, each without par value. FIFTH: The directors of the corporation shall have the power to cause the corporation from time to time and at any time to purchase, hold, sell, transfer or otherwise deal with (A) shares of any class or series issued by it, (B) any security or other obligation of the corporation which may confer upon the holder thereof the right to convert the same into shares of any class or series authorized by the articles of the corporation, and (C) any security or other obligation which may confer upon the holder thereof the right to purchase shares of any class or series authorized by the articles of the corporation. The corporation shall have the right to repurchase, if and when any shareholder desires to sell, or on the happening of any event is required to sell, shares of any class or series issued by the corporation. The authority granted in this Article Fifth of these articles shall not limit the plenary authority of the directors to purchase, hold, sell, transfer or otherwise deal with shares of any class or series, securities, or other obligations issued by the corporation or authorized by its articles. SIXTH: No shareholder of the corporation shall have, as a matter of right, the pre-emptive right to purchase or subscribe for shares of any class, now or hereafter authorized, or to purchase or subscribe for securities or other obligations convertible into or exchangeable for such shares or which by warrants or otherwise entitle the holders thereof to subscribe for or purchase any such share. SEVENTH: The right of every shareholder to vote cumulatively in the election of directors is eliminated, so that no shareholder of the corporation may cumulate his voting power. EIGHTH: Chapter 1704 of the Ohio Revised Code does not apply to the corporation. NINTH: Notwithstanding any provision of the Ohio Revised Code now or hereafter in force requiring for any purpose the vote, consent, waiver or release of the holders of shares of the corporation entitling them to exercise two-thirds (2/3) or any other proportion of the voting power of the corporation or of any class or classes thereof, such action, unless expressly otherwise provided by statute, may be taken by the vote, consent, waiver or release of the holders of the shares entitling them to exercise not less than a majority of the voting power of the corporation or of such class or classes; provided, however, that unless two-thirds (2/3) of the whole authorized number of directors of the corporation shall recommend the approval of any of the following matters, the affirmative vote of the holders of shares entitling them to exercise not less than eighty percent (80%) of the voting power of the corporation entitled to vote thereon shall be required to adopt: (1) a proposed amendment to the articles of the corporation; (2) proposed new regulations, or an alteration, amendment or repeal of the regulations of the corporation; (3) an agreement of merger or consolidation providing for the merger or consolidation of the corporation with or into one or more other corporations; (4) a proposed combination or majority share acquisition involving the issuance of shares of the corporation and requiring shareholder approval; (5) a proposal to sell, lease, or exchange all or substantially all of the property and assets of the corporation; (6) a proposed dissolution of the corporation; or (7) a proposal to fix or change the number of directors by action of the shareholders of the corporation. The written objection of a director to any such matter submitted to the president or secretary of the corporation not less than three days before the meeting of shareholders at which any such matter is to be considered shall be deemed to be an affirmative vote by such director against such matter. TENTH: (A) In addition to any affirmative vote required by any provision of the Ohio Revised Code or by any other provision of these articles, the affirmative vote or consent of the holders of the greater of (i) four-fifths (4/5) of the outstanding common shares of the corporation entitled to vote thereon or (ii) that fraction of such outstanding common shares having as the numerator a number equal to the sum of (a) the number of outstanding common shares Beneficially Owned by Controlling Persons (as hereinafter defined) plus (b) two-thirds (2/3) of the remaining number of outstanding common shares, and as the denominator a number equal to the total number of outstanding common shares entitled to vote, shall be required for the adoption or authorization of a Business Combination (as hereinafter defined) unless: (1) The Business Combination will result in an involuntary sale, redemption, cancellation or other termination of ownership of all common shares of the corporation owned by shareholders who do not vote in favor of, or consent in writing to, the Business Combination and the cash or fair value of other readily marketable consideration to be received by such shareholders for such common shares shall at least be equal to the Minimum Price Per Share (as hereinafter defined); and (2) A proxy statement responsive to the requirements of the Securities Exchange Act of 1934 shall be mailed to the shareholders of the corporation for the purpose of soliciting shareholder approval of the proposed Business Combination. (B) For purposes of this Article TENTH, the following definitions shall apply: (1) "Affiliate" shall mean a Person that directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, another Person. (2) "Associate" shall mean (a) any corporation or organization of which a Person is an officer or partner or is, directory or indirectly, the Beneficial Owner of ten percent (10%) or more of any class of equity securities, (b) any trust or other estate in which a Person has a ten percent (10%) or greater individual interest of any nature or as to which a Person serves as trustee or in a similar fiduciary capacity, (c) any spouse of a Person, and (d) any relative of a Person, or any relative of a spouse of a Person, who has the same residence as such Person or spouse. (3) "Beneficial Ownership" shall include without limitation (a) all shares directly or indirectly owned by a Person, by an Affiliate of such Person or by an Associate of such Person or such Affiliate, (b) all shares which such Person, Affiliate or Associate has the right to acquire through the exercise of any option, warrant or right (whether or not currently exercisable), through the conversion of a security, pursuant to the power to revoke a trust, discretionary account or similar arrangement, or pursuant to the automatic termination of a trust, discretionary account or similar arrangement; and (c) all shares as to which such Person, Affiliate or Associate directly or indirectly through any contract, arrangement, understanding, relationship or otherwise (including without limitation a written or unwritten agreement to act in concert) has or shares voting power (which includes the power to vote or to direct the voting of such shares) or investment power (which includes the power to dispose or direct the disposition of such shares) or both. (4) "Business Combination" shall mean (a) any merger or consolidation of the corporation with or into a Controlling Person or an Affiliate of a Controlling Person or an Associate of such Controlling Person or Affiliate, (b) any sale, lease, exchange, transfer or other disposition, including without limitation a mortgage or any other security device, of all or any Substantial Part of the assets of the corporation, including without limitation any voting securities of a Subsidiary, or of the assets of a Subsidiary, to a Controlling Person or Affiliate of a Controlling Person or Associate of such Controlling Person or Affiliate, (c) any merger into the corporation, or into a subsidiary, of a Controlling Person or an Affiliate of a Controlling Person or an Associate of such Controlling Person or Affiliate, (d) any sale, lease, exchange, transfer or other disposition to the corporation or a Subsidiary of all or any part of the assets of a Controlling Person or Affiliate of a Controlling Person or Associate of such Controlling Person or Affiliate but not including any disposition of assets which, if included with all other dispositions consummated during the same fiscal year of the corporation by the same Controlling Person or Affiliates thereof and Associates of such Controlling Person or Affiliates, would not result in dispositions during such year by all such Persons of assets having an aggregate fair value (determined at the time of disposition of the respective assets) in excess of one percent (1%) of the total consolidated assets of the corporation (as shown on its certified balance sheet as of the end of the fiscal year preceding the proposed disposition); provided, however, that in no event shall any disposition of assets be excepted from shareholder approval by reason of the preceding exclusion if such disposition when included with all other dispositions consummated during the same and immediately preceding four (4) fiscal years of the corporation by the same Controlling Person, Affiliates thereof and Associates of such Controlling Person or Affiliates, would result in disposition by all such Persons of assets having an aggregate fair value (determined at the time of disposition of the respective assets) in excess of two percent (2%) of the total consolidated assets of the corporation (as shown on its certified balance sheet as of the end of the fiscal year preceding the proposed disposition), (e) any reclassification of the common shares of the corporation, or any recapitalization involving common shares of the corporation, consummated within five (5) years after a Controlling Person becomes a Controlling Person, and (f) any agreement, contract or other arrangement providing for any of the transactions described in the definitions of Business Combination. (5) "Control" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. (6) "Controlling Person" shall mean any Person who Beneficially Owns shares of the corporation entitling that Person to exercise twenty percent (20%) or more of the voting power of the corporation entitled to vote in the election of directors. (7) "Minimum Price Per Share" shall mean the sum of (a) the higher of either (i) the highest gross per share price paid or agreed to be paid to acquire any common shares of the corporation Beneficially Owned by a Controlling Person, provided such payment or agreement to make payment was made within five (5) years immediately prior to the record date set to determine the shareholders entitled to vote or consent to the Business Combination in question, or (ii) the highest per share closing public market price for such common shares during such five (5) year period, plus (b) the aggregate amount, if any, by which five percent (5%) for each year, beginning on the date on which such Controlling Person became a Controlling Person, of such higher per share price exceeds the aggregate amount of all common share dividends per share paid in cash since the date on which such Person became a Controlling Person. The calculation of the Minimum Price Per Share shall require appropriate adjustments for capital changes, including without limitation stock splits, stock dividends and reverse stock splits. (8) "Person" shall mean an individual, a corporation, a partnership, an association, a joint-stock company, a trust, any unincorporated organization, a government or political subdivision thereof, and any other entity. (9) "Securities Exchange Act of 1934" shall mean the Securities Exchange Act of 1934, as amended from time to time as well as any successor or replacement statute. (10) "Subsidiary" shall mean any corporation more than twenty-five percent (25%) of whose outstanding securities entitled to vote for the election of directors are Beneficially Owned by the corporation and/or one or more Subsidiaries. (11) "Substantial Part" shall mean more than ten percent (10%) of the total assets of the corporation in question, as shown on its certified balance sheet as of the end of the most recent fiscal year ending prior to the time the determination is being made. (C) During any period in which there are one or more Controlling Persons, this Article TENTH shall not be altered, changed or repealed unless the amendment effecting such alteration, change or repeal shall have received, in addition to any affirmative vote required by any provision of the Ohio Revised Code or by any other provision of these articles, the affirmative vote or consent of the holders of the greater of (i) four-fifths (4/5) of the outstanding common shares of the corporation entitled to vote thereon or (ii) that fraction of such outstanding common shares having as the numerator a number equal to the sum of (a) the number of outstanding common shares Beneficially Owned by Controlling Persons plus (b) two-thirds (2/3) of the remaining number of outstanding common shares, and as the denominator a number equal to the total number of outstanding common shares entitled to vote. ELEVENTH: Any director or the entire Board of Directors may be removed only by the affirmative vote of the holders of shares then entitling them to exercise not less than 80% of the voting power of the corporation at an election of directors, and shareholders may effect such removal only for cause; provided, however, that if any class or series of shares shall entitle the holders thereof to elect one or more directors, any director or all the directors elected by such holders may be removed only by the affirmative vote of the holders of shares of such class or series then entitling them to exercise not less than 80% of the voting power of such class or series at any election of such directors, and such removal may be effected only for cause. Any such removal shall be deemed to create a vacancy in the Board of Directors. TWELFTH: These amended articles supersede the articles of the corporation existing at the effective date of these amended articles. EX-10 4 MATERIAL CONTRACT EXHIBIT 10 SUMMARY OF DEFERRED COMPENSATION PLAN FOR DIRECTORS AND EXECUTIVE OFFICERS In December 1996, life insurance contracts were purchased by the Registrant. The Registrant is the owner of the contracts. One of the purposes of these contracts was to replace a current group life insurance program for executive officers and implement a deferred compensation plan for directors and executive officers in 1996. Participants in the deferred compensation plan are eligible to receive distribution of their contributions, plus accrued interest earned at no greater than market rate on reinvestment of the contributions, upon reaching age 70, provided that, if a participant dies before reaching age 70 and the participant qualifies, distribution shall be made to the participant's designated beneficiary in an amount equal to what the director would have accumulated if the participant had reached age 70 and had continued to make contributions to the plan. The cost of providing the benefits to the participants will be offset by the earnings on the life insurance contracts. EX-13 5 ANNUAL REPORT TO SHAREHOLDERS MESSAGE FROM MANAGEMENT - ----------------------- Convenience...it's not only a word, for Ohio Valley Banc Corp. it's a mission. We were the first to bring ATMs to the area, we were the first to offer banking seven days a week, and now we're the first Ohio bank to cross the river. West Virginia's Ohio Valley Bank For over a century, the people of West Virginia have come in search of quality service and experienced personal bankers. Now, we come to them with a convenient Full Service Bank on their side of the Ohio River. To our old customers we say "Thank you" for your loyalty and patience and to our new ones we say "Welcome" to West Virginia's Ohio Valley Bank. The first interstate bank to establish an office in West Virginia opened its new doors on July 21, 1997. The new 4200 square foot facility opened for business in the first quarter of 1998. This bank features three drive-thru windows, a drive-thru ATM and plenty of parking. We didn't build a branch, we built a Bank. Ohio Valley Bank pushed convenience to the industry's limit in 1997. After a full year of service, customers agree that the OVB SuperBank is the paramount of convenience. A revolution in "bankers' hours," the facility is open 62 hours a week, including evenings and weekends, to handle both teller and lending transactions. Ohio Valley Banc Corp. has made the loan process even faster and easier for the people of Jackson County, Ohio. A convenient new Loan Central office opened in Jackson during the first quarter of 1998. In addition, customers continually take advantage of the convenience of Ohio Valley Bank offices in Jackson, Waverly and Columbus, Ohio. Means Growth Ohio Valley Banc Corp. marked an increase in net income of 16 percent for 1997 compared to a year ago. Net income for 1997 was $3.68 million compared to $3.17 million for 1996, a gain of $514 thousand. Net income per share for the year was $2.07 versus $1.83 per share in 1996. The increase of $.24 per share represented an increase of 13.11 percent. Cash dividends for 1997 were $.79 per share compared to $.74 for 1996, an increase of 6.8 percent. Earnings and cash dividends per share are based on weighted average number of shares outstanding of 1,778,075 for 1997 and 1,732,568 for 1996. Total shareholders' equity increased by $3,788,000. The book value of your stock increased $1.68 to $18.96 per share, based on 1,801,932 shares outstanding December 31, 1997 versus 1,318,262 for December 31, 1996. The NASDAQ quote on market value of Ohio Valley Banc Corp. stock at year end 1997 was $35.00 bid and $38.00 ask. The year end 1996 bid was $26.06 and $27.00 ask. All per share numbers have been adjusted for the 33-1/3 percent stock split effective April 21, 1997. For further information regarding the financial condition and results of operation of your Company, we recommend you refer to Management's Discussion and Analysis of Operations contained in this report. Page 1 For Your Company 1997 brought about the election of two new officers and the creation of a new advisory board. Charles Lanham was elected Executive Vice President of Ohio Valley Bank and Senior Vice President of the Ohio Valley Banc Corp. He is also a member of the Executive Committee and Board of Directors of Ohio Valley Bank. Charles was recognized as 1997's "West Virginia Banker of the Year." Mario Liberatore was elected Senior Vice President of Ohio Valley Bank and Vice President of Ohio Valley Banc Corp. He has taken on the task of managing the West Virginia Bank Group and chairing the new West Virginia Advisory Board. The West Virginia Bank Group becomes the fifth group of Ohio Valley Bank's organizational structure. In addition, three new directors joined the Bank: Phil Bowman, Art Hartley, Sr., and Lannes Williamson. Bowman, Vice President of Waterloo Coal and President of R.A. Eberts, joined early in 1997 and has become a valuable resource for marketing in Jackson County. Hartley, past president of City Ice and Fuel, and Williamson, president of Williamson Pallets, Inc. and Williamson Wood Products, are indispensable counselors for our West Virginia Bank Group. All three of these businessmen are leaders in their communities and assets to your company. With Hartley, Lanham, Liberatore, and Williamson, the following were elected to the West Virginia Advisory Board in November: Anna Barnitz, Business Manager/Treasurer of Bob's Market and Greenhouses, Inc.; Rick Handley, educator for the Mason County Board of Education; Greg Hartley, President of City Ice and Fuel, Inc.; Trenton Stover, CPA; and Raymond Yauger, President of Yauger Farm Supply, Inc. John Musgrave, West Virginia Lottery Director, joined the Board in February of 1998. Three officer promotions were also made to help facilitate the continuing growth of your Company in 1997. Molly Tarbett was promoted to Assistant Vice President, Deposit Operations Manager, and Brenda Henson to Assistant Cashier, Manager Customer Service. Cherie Barr was promoted to Secretary, Loan Central. Now, nine offices strong, Ohio Valley Bank continues to build a lasting trust with the community. This is proven by the Bank's outstanding customer retention record and customer base expansion. Loan Central used its first full year of operation to build a foundation for growth and stability. The finance company is building relationships with individual, non-business customers in smaller amounts and higher yields than is possible with the Bank. Each company works to provide easily accessible financial services for our communities. As we approach a new millennium, convenience means growth for your company. Ohio Valley Banc Corp. James L. Dailey Chairman of the Board and Chief Executive Officer Jeffrey E. Smith President and Chief Operating Officer Page 2 WEST VIRGINIA BANK GROUP REPORT - ------------------------------- In 1997 Ohio Valley Bank broke new banking ground by being the first bank to take advantage of the new Interstate banking law and entered the West Virginia market. Your Company got a jumpstart on this venture which proved to be a definite advantage over the competition. Three years ago, management foresaw the potential of banking in West Virginia and prepared for it by establishing the OVB Loan Origination Center in Point Pleasant. By law, this facility could only distribute and collect loan applications. The laws changed in June of 1997, permitting Ohio state chartered banks to have full-service offices in West Virginia. Ohio Valley Bank was ready. Within a month, we had a full-service office located in downtown Point Pleasant. However, this was only a temporary office. The new office was completed in the first quarter of 1998. This office reflects the historic significance of Point Pleasant. The full-service facility offers 3 convenient drive-thru windows and a drive-thru ATM. Senior Vice President Mario Liberatore stated, "The activity generated thus far at Point Pleasant indicates Ohio Valley Bank is not only well recognized by the West Virginia market, but very well received." By December 31, the office had exceeded our expectations in number of accounts opened. These accounts included demand deposit accounts, certificates of deposit and loans. Customers who have always come to us and new customers are enjoying the convenience of a hometown bank. The West Virginia Advisory Board was formed to give OVB an advantage in this new market. On the following page, we introduce the new board which consists of Anna Barnitz, Rick Handley, Greg Hartley, John Musgrave, Trenton Stover and Raymond Yauger. As mentioned in the Message From Management, these individuals represent all types of business in Mason County. Their experience has become a valuable resource for the Bank. Each day we learn more about our new West Virginia customers in order to effectively market the Bank's products. As we launch the banking industry into the next millennium, we must remember the importance of the West Virginia market. Page 3 GROUP REPORTS - ------------- "The Administrative Services Bank Group has just completed an exciting year," said Senior Vice President Sue Ann Bostic. On the heels of the opening of our Columbus office, we began construction on OVB's first full-service branch in West Virginia. With the aid of the Research and Development department personnel, our Wide Area Network was completed which enhances communication among all our branches. This group continues to strive to efficiently handle personnel matters and this year saw the installation of a new payroll system which will give the Human Resource area the ability to become more flexible in monitoring payroll and benefits. The Training area was instrumental in giving over 50 new employees their first experience in a career in banking. Additionally, with the completion of our new Multi-Media room at the OVB Annex, our classroom setting gained a new meaning. A ten week course in Advanced Teller Training was added to the training agenda. Our goal as we enter another year is to remain focused on optimizing personnel expense as we continue to grow in new market areas. The Administrative Services Group looks forward to being a part of 1998 and the opportunity to serve our employees as well as our valued customers. Loan Central's two offices finished out 1997 with loan balances of $4 million. This was an increase of $1.4 million or 52% in our loan portfolio. Loan Central continues to meet its original goal, which is to help the Banc Corp meet the communities' total credit needs. The finance company's loan portfolio is made up of personal, auto, agricultural and mortgage loans. Our employees' number one goal is to increase the Corporation's shareholders' return, while giving the best customer service possible. "We are proud to announce the opening of our third office located at 323 East Broadway Street in Jackson, Ohio," said Senior Vice President Mike Francis. "We currently have approximately 150 loans in our Gallipolis and South Point offices from customers in the Jackson area. These loans will be moved to the Jackson office to provide convenience for our customers and a headstart for this new office." Plans for the future of Loan Central include upgrading our computer software to be connected to the Bank's computer networks and changing our loan documents from preprinted forms to laser printed forms. These forms will be of better quality and will also cost less to produce. 1997 has been a challenging year for the Retail Bank Group as customers continue to search for convenience and quality service. If anyone should say convenience is not important to the customer, he should take a few minutes from his busy schedule and visit our SuperBank in the downtown Gallipolis Foodland. We recently celebrated our first full year at the SuperBank. Customers take advantage of our weekend and evening hours making this office one of our busiest branches. For many customers, the SuperBank is now a necessity, not merely a convenience. Page 4 Soon, we will open our second SuperBank in the Gallipolis Wal-Mart SuperCenter. Our customers will have the advantage of more non-traditional weekend and evening banking hours. In addition to our existing customers, any folks from surrounding counties who want to bank at OVB, but can't make it to our locations during regular hours, now have an alternative. The extended hours at Wal-Mart will complement our new, full-service office in Point Pleasant, W. Va. Everyday we learn more about staying competitive in the lending industry. Our competition today is not only local banking institutions. We compete with credit unions, mortgage companies, and now, other services that customers locate on the internet. Our real estate and installment loan market share has continually increased in all counties despite the obstacles our lenders face each day from the increased competition. "Our success may be attributed to our personal touch and fast, convenient service," said Senior Vice President Katrinka Hart. OVB must prepare for the new millennium in order to survive and prosper. In 1998, the Retail Group will place special emphasis on "people serving people." We must focus on customer service and satisfaction. Customers will determine our success by the choices they make. We will continue to search for new ideas to continue OVB's tradition of quality and convenience. Examples you may see in the near future are additional SuperBanks and OVB Jeanie(R) ATMs. In the COMMERCIAL BANK GROUP, 1997 was a year of "strengthening the foundations" in order to continue to support our existing customers and to provide appropriate services and products for new customers. This was a time of lots of hard work and commitment from many of the entire bank staff in order to help this transition occur. Our staff and customers have adjusted very well to the new systems support. We saw growth and expansion of our portfolio into the central Ohio region and further expansion in the West Virginia markets. We are extremely pleased with the new customer base in Columbus. It continues to grow and flourish. Additional support is being directed to this market in 1998 in order to further establish ourselves in that market. The interest rate volatility and shrinking markets make the commercial loan business more challenging and requires continued training awareness. We are committed to the continued nurturing of existing customers; knowing their changing needs and meeting them. Additionally, as we act on our commitment to cultivate new relationships we are prepared to quickly and flexibly meet their needs with personal and "red carpet service" in order to attract and keep them. Page 5 We are continuing to emphasize our Trust Services Department. We believe there is an unrecognized need among many of our customers and employees alike. Our Trust Services Department has the expertise and ability to provide the tailored and personal services many trust customers want and need. Senior Vice President Rich Mahan explains, "With our familiar faces, experienced staff, excellent systems, our desire to grow and the help of our directors and executive staff, the Commercial Bank Group will continue to make a significant contribution to the profitability of our Bank." The FINANCIAL BANK GROUP is continually looking for ways to improve customer service and increase operating efficiencies. The effective use of technology is one way to achieve such goals. During 1997 your company made a significant investment in new technology which will enable us to focus more on the needs of our customers and drive down operating costs. Now that we have the technology in place, the challenge before us is to leverage the capabilities of that technology to our advantage. To do so will require us to rethink our current processes and procedures to determine if in fact they are still relevant in today's rapidly changing environment. Simply doing things because "we've always done them that way" will not be good enough. As we approach the threshold of the 21st Century your company is preparing for the year 2000 dilemma, the fact that a significant amount of computer software is challenged with dates beyond 1999. Senior Vice President Larry Miller stated, "Although we have been assured by our vendor that our mission critical hardware and software is year 2000 ready, we are planning to test our systems to verify that fact." "All of our Bank Groups are working toward continued prosperity into the next millennium," stated Senior Vice President and Secretary Wendell Thomas. "The ground work has been laid. OVB and Loan Central have earned large percentages of the market in the six counties where offices are located. 1998 calls for even more expansion making the Ohio Valley Banc Corp. one of the most accessible and trusted financial institutions in the region." Page 6 DESCRIPTION OF BUSINESS - ----------------------- Ohio Valley Banc Corp. commenced operations on October 23, 1992 as a one-bank holding company, with The Ohio Valley Bank Company being the wholly-owned subsidiary. The Company's headquarters are located at 420 Third Avenue in Gallipolis, Ohio. The Bank was organized on September 24, 1872. The Bank is insured under the Federal Deposit Insurance Act and is chartered under the banking laws of the State of Ohio. The Bank offers a blend of commercial, retail, and agricultural banking services. Loans of all types and checking, savings and time deposits are offered, along with such services as safe deposit boxes, issuance of travelers' checks and trusts. The Bank presently has nine offices, six of which offer drive-up services. In April 1996, the Banc Corp. opened a consumer finance company operating under the name of Loan Central with offices in Gallipolis, South Point and Jackson, Ohio. FORM 10-K A copy of the Company's annual report on Form 10-K, as filed with the Securities and Exchange Commission, will be forwarded without charge to any stockholder upon written request to: Ohio Valley Banc Corp. Attention: Wendell B. Thomas, Secretary 420 Third Avenue P.O. Box 240 Gallipolis, Ohio 45631 Page 7 FINANCIAL HIGHLIGHTS 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- NET INCOME ($000) $ 3,680 $ 3,166 $ 2,728 $ 2,425 $ 2,025 TOTAL ASSETS ($000) $364,095 $340,923 $317,045 $313,525 $292,768 EARNINGS PER SHARE $ 2.07 $ 1.83 $ 1.62 $ 1.49 $ 1.28 DIVIDENDS PER SHARE $ .79 .74 .71 .67 .65 Page 8 SELECTED FINANCIAL DATA Years Ended December 31 SUMMARY OF OPERATIONS: 1997 1996 1995 1994 1993 (dollars in thousands, except per share data) Total interest income $ 30,310 $ 27,091 $ 24,996 $ 21,453 $ 20,636 Total interest expense 13,902 12,251 12,663 10,175 10,189 Net interest income 16,408 14,840 12,333 11,278 10,447 Provision for loan losses 1,245 1,319 614 413 975 Total other income 1,860 1,419 1,294 1,135 1,135 Total other expenses 11,920 10,468 9,151 8,510 7,626 Income before income taxes and cumulative effect of change in accounting method 5,103 4,472 3,862 3,490 2,981 Income taxes 1,423 1,306 1,134 1,065 881 Cumulative effect of change in accounting method 75 Net income 3,680 3,166 2,728 2,425 2,025 PER SHARE DATA(1): Net income per share $ 2.07 $ 1.83 $ 1.62 $ 1.49 $ 1.28 Cash dividends per share $ .79 $ .74 $ .71 $ .67 $ .65 Weighted average number of shares outstanding 1,778 1,733 1,686 1,630 1,576 AVERAGE BALANCE SUMMARY: Total loans $261,252 $238,366 $207,447 $195,023 $178,208 Securities (2) 68,422 72,244 92,642 90,139 85,154 Deposits 291,719 278,075 268,742 258,114 250,057 Shareholders' equity 31,867 28,568 25,645 23,078 21,060 Total assets 354,393 327,483 320,142 302,720 289,110 PERIOD END BALANCES: Total loans $269,779 $254,044 $216,757 $200,320 $185,122 Securities (2) 72,181 66,666 82,804 94,006 90,036 Deposits 293,712 281,825 272,369 263,988 247,190 Shareholders' equity 34,166 30,378 27,577 24,388 22,150 Total assets 364,095 340,923 317,045 313,525 292,768 KEY RATIOS: Return on average assets 1.04% .97% .85% .80% .70% Return on average equity 11.55% 11.08% 10.64% 10.51% 9.62% Dividend payout ratio 37.94% 40.51% 43.77% 45.17% 50.31% Average equity to average assets 8.99% 8.72% 8.01% 7.62% 7.28% (1) Restated for stock splits as appropriate. (2) Securities include interest-bearing balances with banks. Page 9 CONSOLIDATED STATEMENTS OF CONDITION As of December 31 1997 1996 ----------------- ---- ---- (dollars in thousands) ASSETS Cash and noninterest-bearing deposits with banks $ 7,712 $ 8,688 Federal funds sold 94 -------- -------- Total cash and cash equivalents 7,806 8,688 Interest-bearing balances with banks 103 77 Securities available-for-sale, at estimated fair value 32,659 30,592 Securities held-to-maturity (approximate market value of $39,935,000 in 1997 and $36,253,000 in 1996) 39,419 35,997 Total Loans 269,779 254,044 Less: Allowance for loan losses (3,290) (3,080) -------- -------- Net Loans 266,489 250,964 Premises and equipment 7,326 6,366 Accrued income receivable 2,503 2,355 Other assets 7,790 5,884 -------- -------- Total assets $364,095 $340,923 ======== ======== LIABILITIES Noninterest-bearing deposits $ 37,100 $ 34,092 Interest-bearing deposits 256,612 247,733 -------- -------- Total Deposits 293,712 281,825 Securities sold under agreements to repurchase 12,831 8,714 Other borrowed funds 19,479 17,210 Accrued liabilities 3,907 2,796 -------- -------- Total liabilities 329,929 310,545 -------- -------- SHAREHOLDERS' EQUITY Common stock ($1 stated value: authorized 5,000,000 shares, outstanding 1,801,932 shares issued and outstanding at December 31, 1997; 1,318,262 shares issued and outstanding at December 31, 1996) 1,802 13,183 Surplus 25,930 12,619 Retained earnings 6,207 4,376 Net unrealized gain on available-for-sale securities 227 200 -------- -------- Total shareholders' equity 34,166 30,378 -------- -------- Total liabilities and shareholders' equity $364,095 $340,923 ======== ======== See accompanying notes to consolidated financial statements Page 10 CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31 1997 1996 1995 ------------------------------- ---- ---- ---- (dollars in thousands, except per share data) INTEREST INCOME: Interest and fees on loans $25,949 $22,755 $19,587 Interest and dividends on securities Taxable 3,316 3,408 4,195 Nontaxable 635 618 514 Dividends 203 149 136 ------- ------- ------- 4,154 4,175 4,845 Interest on federal funds sold 202 158 382 Interest on deposits with banks 5 3 182 ------- ------- ------- Total interest income 30,310 27,091 24,996 INTEREST EXPENSE: Interest on deposits 12,548 11,487 11,772 Interest on repurchase agreements 435 339 597 Interest on other borrowed funds 919 425 294 ------- ------- ------- Total interest expense 13,902 12,251 12,663 ------- ------- ------- NET INTEREST INCOME 16,408 14,840 12,333 Provision for loan losses 1,245 1,319 614 ------- ------- ------- Net interest income after provision for loan losses 15,163 13,521 11,719 OTHER INCOME: Service charges on deposit accounts 912 898 769 Trust division income 192 197 253 Other operating income 756 352 272 Net realized loss on sale of available- for-sale securities (28) ------- ------- ------- 1,860 1,419 1,294 ------- ------- ------- OTHER EXPENSE: Salaries and employee benefits 7,132 6,206 5,373 FDIC premiums 36 2 310 Occupancy expense 531 453 356 Furniture and equipment expense 749 606 524 Corporation franchise tax 337 382 356 Data processing expense 389 449 323 Other operating expenses 2,746 2,370 1,909 ------- ------- ------- 11,920 10,468 9,151 ------- ------- ------- Income before federal income taxes 5,103 4,472 3,862 Federal income taxes 1,423 1,306 1,134 ------- ------- ------- NET INCOME $ 3,680 $ 3,166 $ 2,728 ======= ======= ======= Net income per share $ 2.07 $ 1.83 $ 1.62 ======= ======= ======= Average shares outstanding 1,778 1,733 1,686 ======= ======= ======= See accompanying notes to consolidated financial statements Page 11 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 1997, 1996 and 1995 Net Unrealized Gain (Loss) on Available- Total Common Retained for-Sale Shareholders' (dollars in thousands) Stock Surplus Earnings Securities Equity ----- ------- -------- ---------- ------ BALANCES AT JANUARY 1, 1995 $ 7,475 $11,018 $ 6,066 $ (171) $24,388 Net income 2,728 2,728 Common Stock split, 33-1/3% 2,507 (2,507) Cash paid in lieu of fractional shares in stock split (11) (11) Common Stock issued, 5,000 shares 50 130 180 Common Stock issued through dividend reinvestment 261 691 952 Cash dividends, $.71 per share (1,194) (1,194) Net change in unrealized loss on marketable equity securities 534 534 ------- ------- ------- ------- ------- BALANCES AT DECEMBER 31, 1995 10,293 11,839 5,082 363 27,577 Net income 3,166 3,166 Common Stock split, 25% 2,580 (2,580) Cash paid in lieu of fractional shares in stock split (9) (9) Common Stock issued, 5,500 shares 55 140 195 Common Stock issued through dividend reinvestment 255 640 895 Cash dividends, $.74 per share (1,283) (1,283) Net change in unrealized gain on available-for-sale securities (163) (163) ------- ------- ------- ------- ------- BALANCES AT DECEMBER 31, 1996 13,183 12,619 4,376 200 30,378 Net income 3,680 3,680 Common Stock split, 33-1/3% 442 (442) Change in stated value from $10 per per share to $1 per share (11,937) 11,937 Cash paid in lieu of fractional shares in stock split (11) (11) Common Stock issued, 6,500 shares 6 231 237 Common Stock issued through dividend reinvestment 108 1,143 1,251 Cash dividends, $.79 per share (1,396) (1,396) Net change in unrealized gain on available-for-sale securities 27 27 ------- ------- ------- ------- ------- BALANCES AT DECEMBER 31, 1997 $ 1,802 $25,930 $ 6,207 $ 227 $34,166 ======= ======= ======= ======= =======
See accompanaying notes to consolidated financial statements Page 12 CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31 1997 1996 1995 ------------------------------- ---- ---- ---- (dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,680 $ 3,166 $ 2,728 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 705 551 486 Amortization and accretion of securities 47 50 130 Deferred tax benefit 17 (196) (8) Provision for loan losses 1,245 1,319 614 Gain from sale of student loans (22) Contribution of common stock to ESOP 237 195 180 FHLB stock dividend (172) (106) (96) Net loss on sale of equity securities 28 Change in accrued income receivable (148) 53 (87) Change in accrued liabilities 1,112 (69) 829 Change in other assets (1,301) 257 (180) ------- ------- ------- Net cash provided by operating activities 5,422 5,248 4,574 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of securities available-for-sale 4,500 11,000 Purchases of securities available-for-sale (6,314) (8,708) Proceeds from maturities of securities held-to-maturity 14,390 14,063 22,675 Purchases of securities held-to-maturity (17,900) (770) (15,793) Proceeds from sale of equity securities 364 Change in interest-bearing deposits in other banks (25) (27) 5,008 Proceeds from sale of student loans 1,441 Net increase in loans (16,771) (37,914) (18,266) Purchases of premises and equipment (1,666) (1,339) (604) Purchases of insurance contracts (635) (5,210) ------- ------- ------- Net cash used in investing activities (24,421) (28,541) (5,539) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Change in deposits 11,887 9,456 8,381 Cash dividends (1,396) (1,283) (1,194) Cash paid in lieu of fractional shares in stock split (11) (9) (11) Proceeds from issuance of common stock 1,251 895 952 Change in securities sold under agreements to repurchase 4,117 (790) (8,530) Proceeds from long-term borrowings 11,425 4,500 Repayment of long-term borrowings (6,681) (2,869) (349) Change in other short-term borrowings (2,475) 10,850 ------- ------- ------- Net cash used in financing activities 18,117 20,750 (751) ------- ------- ------- CASH AND CASH EQUIVALENTS: Change in cash and cash equivalents (882) (2,543) (1,716) Cash and cash equivalents at beginning of year 8,688 11,231 12,947 ------- ------- ------- Cash and cash equivalents at end of year $ 7,806 $ 8,688 $11,231 ======= ======= ======= CASH PAID DURING THE YEAR FOR: Interest $13,250 $12,363 $11,802 Income taxes 1,160 1,360 1,173
See accompanying notes to consolidated financial statements Page 13 Note A - Summary of Significant Accounting Policies Principles of Consolidation: The consolidated financial statements include the accounts of the Ohio Valley Banc Corp. (the Company) and its wholly-owned subsidiaries, The Ohio Valley Bank Company (the Bank) and Loan Central, a consumer finance company. All significant intercompany balances and transactions have been eliminated. Industry Segment Information: The Company is engaged in the business of commercial and retail banking and trust services, with operations conducted through its main office and 8 branches located in central and southeastern Ohio as well as West Virginia. Loan Central's operations are conducted through its 3 offices located in Gallipolis, South Point and Jackson, Ohio. These communities are the source of substantially all of the Company's deposit, loan and trust services. The majority of the Company's income is derived from commercial and retail business lending activities. Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Areas involving the use of management's estimates and assumptions that are more susceptible to change in the near term involve the allowance for loan losses, the fair value of certain securities, the fair value of financial instruments and the determination and carrying value of impaired loans. Cash and Cash Equivalents: Cash and cash equivalents include cash on hand, noninterest-bearing deposits with banks and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. The Company reports net cash flows for customer loan transactions, deposit transactions and interest-bearing deposits with other financial institutions. Securities: The Company classifies securities into held-to-maturity and available-for-sale categories. Held-to-maturity securities are those which the Company has the positive intent and ability to hold to maturity and are reported at amortized cost. Securities classified as available-for-sale include marketable equity securities and other securities that management intends to sell or that would be sold for liquidity, investment management or similar reasons even if there is not a present intention of such a sale. Available-for-sale securities are reported at fair value, with unrealized gains or losses included as a separate component of equity, net of tax. Premium amortization is deducted from, and discount accretion is added to, interest income on securities using the level yield method. Gains and losses are recognized upon the sale of specific identified securities on the completed transaction basis. Revenue Recognition: Interest on loans is accrued over the term of the loans based upon the principal outstanding. Management reviews loans delinquent 90 days or more to determine if the interest accrual should be discontinued. The carrying value of impaired loans is periodically adjusted to reflect cash payments, revised estimates for future cash flows and increases in the present value of expected cash flows due to the passage of time. Cash payments representing interest income are reported as such and other cash payments are reported as reductions in carrying value. Increases or decreases in carrying value due to changes in estimates of future payments or the passage of time are reported as reductions or increases in bad debt expense. Allowance for Loan Losses: Because some loans may not be repaid in full, an allowance for loan losses is recorded. Increases to the allowance are recorded by a provision for loan losses charged to expense. Estimating the risk of loss and the amount of loss on any loan is necessarily subjective. Accordingly, the allowance is maintained by management at a level considered adequate to cover losses that are currently anticipated based on past loss experience, general economic conditions, information about specific borrower situations, including their financial position and collateral value, and other factors and estimates which are subject to change over time. While management may periodically allocate portions of the allowance for specific problem situations, the entire allowance is available for any charge-offs that occur. A loan is charged off by management as a loss when deemed uncollectable, although collection efforts continue and future recoveries may occur. Loans are considered impaired if full principal or interest payments are not anticipated. Impaired loans are carried at the present value of expected cash flows discounted at the loan's effective interest rate or at the fair value of the collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans. Smaller-balance homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by one-to-four family residences, residential construction loans, credit card and automobile, home equity and second mortgage loans. Commercial loans and mortgage loans secured by other Page 14 Summary of Significant Accounting Policies (continued) properties are evaluated individually for impairment. When analysis of borrower operating results and financial condition indicates that underlying cash flows of the borrower's business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Loans are generally moved to nonaccrual status when 90 days or more past due. These loans are often also considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectable. This typically occurs when the loan is 120 or more days past due. Concentrations of Credit Risk: The Company, through its subsidiaries, grants residential, consumer and commercial loans to customers located primarily in the southeastern Ohio area. The following represents the composition of the loan portfolio at Dec. 31, 1997: % of Total Loans ---------------- Real Estate loans .......................... 40.87% Commercial and industrial loans............. 28.96% Consumer loans ............................. 29.22% All other loans ............................ .95% ------ 100.00% ====== Approximately 9.55% of total loans are unsecured. The Bank, in the normal course of its operations, conducts business with correspondent financial institutions. Balances in correspondent accounts, investments in federal funds, certificates of deposit and other short-term securities are closely monitored to ensure that prudent levels of credit and liquidity risks are maintained. At December 31, 1997, the Bank's primary correspondent balance was $2,585,000 at the Federal Reserve Bank, Cleveland, Ohio. Premises and Equipment: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the declining balance and straight-line methods over the estimated useful lives of the various assets. Maintenance and repairs are expensed and major improvements are capitalized. Other Real Estate: Real estate acquired through foreclosure or deed-in-lieu of foreclosure is included in other assets. Such real estate is carried at the lower of investment in loan or estimated fair value of the property less estimated selling costs. Any reduction to fair value at the time of acquisition is accounted for as a loan charge-off. Any subsequent reduction in fair value is recorded as a loss on other assets. Costs incurred to carry other real estate are charged to expense. Other real estate owned totaled $142,000 at December 31, 1997 and $217,000 at December 31, 1996. There were no transfers of loans to other real estate in 1997. Transfers of loans to other real estate were $15,000 and $202,000 in 1996 and 1995. Per Share Amounts: Basic and diluted earnings per share are computed under a new accounting standard effective in the quarter ended December 31,1997. Basic earnings per share is based on net income divided by the following weighted average number of shares outstanding during the periods: 1,778,075 for 1997, 1,732,568 for 1996 and 1,685,853 for 1995. Diluted earnings per share reflects the dilutive effect of additional common stock equivalents using the treasury method. Since there are no common stock equivalents outstanding at or during the years ended December 31, 1997, 1996 and 1995, the weighted average number of shares used for determining diluted earnings per share were the same as the number of shares used for basic earnings per share. In April 1997, the Board of Directors declared a 33-1/3% stock split and in April 1996, the Board of Directors declared a 25% stock split. All earnings and dividends per share disclosures have been restated to retroactively reflect these stock splits. Income Taxes: Income tax expense is the sum of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Reclassifications: The consolidated financial statements for 1996 and 1995 have been reclassified to conform with the presentation for 1997. Such reclassifications had no effect on the net results of operations. Page 15 NOTE B - SECURITIES The amortized cost and estimated fair value of securities as follows:
(dollars in thousands) Gross Gross Estimated Amortized Unrealized Unrealized Fair December 31, 1997 Cost Gains Losses Value - ----------------- ---- ----- ------ ----- Securities Available-for-Sale ----------------------------- U.S. Treasury securities $27,093 $ 353 $27,446 U.S. Government agency securities 2,028 34 2,062 Marketable equity securities 3,194 $ 43 3,151 ------- ----- ----- ------- Total securities available-for-sale $32,315 $ 387 $ 43 $32,659 ======= ===== ===== ======= Securities Held-to-Maturity --------------------------- U.S. Government agency securities $24,509 $ 126 $ 13 $24,622 Obligations of states and political subdivisions 13,935 422 14,357 Corporate obligations 503 3 506 Mortgage-backed securities 472 1 23 450 ------- ----- ----- ------- Total securities held-to-maturity $39,419 $ 552 $ 36 $39,935 ======= ===== ===== ======= Gross Gross Estimated Amortized Unrealized Unrealized Fair December 31, 1996 Cost Gains Losses Value - ----------------- ---- ----- ------ ----- Securities Available-for-Sale ----------------------------- U.S. Treasury securities $28,039 $ 432 $ 4 $28,467 Marketable equity securities 2,250 125 2,125 ------- ----- ----- ------- Total securities available-for-sale $30,289 $ 432 $ 129 $30,592 ======= ===== ===== ======= Securities Held-to-Maturity --------------------------- U.S. Government agency securities $22,441 $ 100 $ 84 $22,457 Obligations of states and political subdivisions 12,252 289 30 12,511 Corporate obligations 758 8 766 Mortgage-backed securities 546 2 29 519 ------- ----- ----- ------- Total securities held-to-maturity $35,997 $ 399 $ 143 $36,253 ======= ===== ===== =======
Securities with a carrying value of approximately $47,842,000 at December 31, 1997 and $48,307,000 at December 31, 1996 were pledged to secure public deposits and for other purposes as required or permitted by law. The amortized cost and estimated fair value of debt securities at December 31, 1997, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers may have the right to call or prepay the debt obligations prior to their contractual maturities. Available-for-Sale Held-to-Maturity ------------------ ---------------- Estimated Estimated Amortized Fair Amortized Fair Debt Securities: Cost Value Cost Value ---- ----- ---- ----- Due in one year or less $ 9,266 $ 9,306 $10,928 $10,970 Due in one to five years 19,855 20,202 21,381 21,568 Due in five to ten years 5,768 6,059 Due after ten years 870 888 Mortgage-backed securities 472 450 ------- ------- ------- ------- Total debt securities $29,121 $29,508 $39,419 $39,935 ======= ======= ======= ======= Proceeds from the sale of equity securities in 1996 were $364,000 with gross losses of $28,000 realized. There were no sales of debt or equity securities during 1997 or 1995. Page 16 NOTE C - LOANS Loans are comprised of the following at December 31: (dollars in thousands) 1997 1996 ---- ---- Real estate loans $110,247 $102,158 Commercial and industrial loans 78,124 74,666 Consumer loans 78,840 74,908 All other loans 2,568 2,312 -------- -------- Total Loans $269,779 $254,044 ======== ======== NOTE D - ALLOWANCE FOR LOAN LOSSES Following is an analysis of changes in the allowance for loan losses for years ended December 31: 1997 1996 1995 ---- ---- ---- Balance, beginning of year $3,080 $2,388 $2,184 Loans charged-off: Real estate 39 3 28 Commercial 215 78 182 Consumer 961 673 304 ------ ------ ------ Total loans charged-off 1,215 754 514 Recoveries of loans: Real estate 1 Commercial 41 73 57 Consumer 138 54 47 ------ ------ ------ Total recoveries of loans 180 127 104 Net loan charge-offs (1,035) (627) (410) Provision charged to operations 1,245 1,319 614 ------ ------ ------ Balance, end of year $3,290 $3,080 $2,388 ====== ====== ====== Information regarding impaired loans is as follows: 1997 1996 ---- ---- Balance of impaired loans $430 $449 ==== ==== Portion of impaired loan balance for which an allowance for credit losses is allocated $430 $449 ==== ==== Portion of allowance for loan losses allocated to the impaired loan balance $200 $200 ==== ==== Average investment in impaired loans for the year $440 $514 ==== ==== Interest on impaired loans was not material for years ending 1997 and 1996. Page 17 NOTE E - PREMISES AND EQUIPMENT Following is a summary of premises and equipment at December 31: (dollars in thousands) 1997 1996 ---- ---- Land $ 1,166 $ 1,108 Buildings 6,213 5,445 Furniture and equipment 4,549 3,710 ------- ------- 11,928 10,263 Less accumulated depreciation 4,602 3,897 ------- ------- Total Premises and Equipment $ 7,326 $ 6,366 ======= ======= The following is a summary of the future minimum lease payments for facilities leased by the Company. Lease payments were $83,800 in 1997 and $54,600 in 1996. 1998 $ 83,558 1999 48,525 2000 38,900 2001 38,158 2002 30,000 -------- $239,141 ======== NOTE F - DEPOSITS Following is a summary of interest-bearing deposits at December 31: 1997 1996 (dollars in thousands) ---- ---- NOW accounts $ 29,439 $ 28,492 Savings and Money Market 44,272 45,712 Time: IRA accounts 28,102 28,044 Certificates of Deposit: In denominations under $100,000 113,955 109,329 In denominations of $100,000 or more 40,844 36,156 -------- -------- Total time deposits 182,901 173,529 -------- -------- Total interest-bearing deposits $256,612 $247,733 ======== ======== Following is a summary of total time deposits by remaining maturities at December 31: 1997 1996 ---- ---- Within one year $133,554 $103,851 From one to two years 33,380 58,513 From two to three years 8,060 2,214 From three to four years 2,902 2,561 From four to five years 3,670 2,577 Thereafter 1,335 3,813 -------- -------- Totals $182,901 $173,529 ======== ======== Page 18 NOTE G - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Following is a summary of securities sold under agreements to repurchase at December 31: (dollars in thousands) 1997 1996 ---- ---- Balance outstanding at period end $12,831 $ 8,714 ------- ------- Weighted average interest rate at period end 3.95% 3.50% ------- ------- Average amount outstanding during the year $11,352 $ 9,813 ------- ------- Approximate weighted average interest rate during the year 3.83% 3.46% ------- -------- Maximum amount outstanding as of any month end $16,768 $12,288 ------- ------- Securities underlying these agreements at year-end were as follows: Carrying value of securities $28,336 $21,728 ------- ------- Fair Value $28,634 $21,804 ------- ------- NOTE H - OTHER BORROWED FUNDS (dollars in thousands) Other borrowed funds at December 31, 1997 and 1996 are comprised of advances from the Federal Home Loan Bank (FHLB) and promissory notes. Pursuant to collateral agreements with the FHLB, advances are secured by certain qualifying first mortgage loans and by FHLB stock which total $27,828,000 and $2,569,000 at December 31, 1997. Promissory notes have been issued primarily by Loan Central and are due at various dates through a final maturity date of May 29, 2002. Interest Balance Balance Maturity Rate at 12-31-97 at 12-31-96 - -------- ---- ----------- ----------- 1997 6.91% $11,675 1998 5.55%-6.05% $15,096 448 2000 6.00%-6.15% 1,500 1,500 2002 5.80%-6.10% 1,957 2,301 ------- ------- Total FHLB borrowings 18,553 15,924 Promissory notes 4.50%-7.10% 926 1,286 ------- ------- Total $19,479 $17,210 ======= ======= The following table is a summary of the scheduled principal payments for these borrowings: FHLB borrowings Promissory notes --------------- ---------------- 1998 $15,493 $885 1999 390 11 2000 1,914 12 2001 439 13 2002 317 5 ------- ---- $18,553 $926 ======= ==== Page 19 NOTE I - INCOME TAXES The provision for federal income taxes consists of the following components:
(dollars in thousands) 1997 1996 1995 ---- ---- ---- Current tax expense $1,406 $1,502 $1,142 Deferred tax expense (benefit) 17 (196) (8) ------ ------ ------ Total federal income taxes $1,423 $1,306 $1,134 ====== ====== ====== The sources of gross deferred tax assets and gross deferred tax liabilities at December 31: 1997 1996 1995 ---- ---- ---- Items giving rise to deferred tax assets: Allowance for loan losses in excess of tax reserve $ 884 $ 848 $ 637 Deferred compensation 113 22 Other 29 36 7 Items giving rise to deferred tax liabilities: Investment accretion (94) (72) (44) Depreciation (94) (68) (67) FHLB stock dividends (167) (109) (81) Unrealized gain on securities available-for-sale (117) (103) (188) Lease receivables (56) (23) (10) Other (7) (9) (12) ------ ------ ------ Net deferred tax asset $ 491 $ 522 $ 242 ====== ====== ====== The difference between the financial statement tax provision and amounts computed by applying the statutory federal income tax rate of 34% to income before taxes is as follows: 1997 1996 1995 ---- ---- ---- Statutory tax $1,735 $1,521 $1,313 Effect of nontaxable interest and dividends (242) (243) (197) Nondeductible interest expense 38 35 26 Insurance contracts (99) Other items (9) (7) (8) ------ ------ ------ Total federal income taxes $1,423 $1,306 $1,134 ====== ====== ======
NOTE J - COMMITMENTS AND CONTINGENT LIABILITIES The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit, and financial guarantees written, is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for instruments recorded on the balance sheet. Page 20 NOTE J - COMMITMENTS AND CONTINGENT LIABILITIES(continued) (dollars in thousands) Following is a summary of such commitments at December 31: (dollars in thousands) Commitments to extend credit 1997 1996 Fixed rate $ 423 $ 680 Variable rate 29,955 21,821 Standby letters of credit 9,265 6,286 The interest rate on fixed rate commitments ranged from 7.875% to 17.90% at December 31, 1997. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties. There are various contingent liabilities that are not reflected in the financial statements, including claims and legal action arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material effect on financial condition or results of operations. The bank subsidiary of the Company is required to maintain average reserve balances with the Federal Reserve Bank or as cash in the vault. The amount of those reserve balances for the year ended December 31, 1997, was approximately $2,762,000. NOTE K - RELATED PARTY TRANSACTIONS (dollars in thousands) Certain directors, executive officers and companies in which they are affiliated were loan customers during 1997. A summary of activity on these borrower relationships with aggregate debt greater than $60,000 is as follows: Total loans at January 1, 1997 $ 4,373 New loans 1,665 Repayments (880) Other changes 5,500 ------- Total loans at December 31, 1997 $10,658 ======= Other changes include adjustment for loans applicable to one reporting period that are excludable from the other reporting period. Page 21 NOTE L - EMPLOYEE BENEFITS (dollars in thousands) The Bank has a profit-sharing plan for the benefit of its employees and their beneficiaries. Contributions to the plan are determined by the Board of Directors. Contributions charged to operations were $128,000, $115,000 and $96,000 for 1997, 1996 and 1995. The Company maintains an Employee Stock Ownership Plan (ESOP) covering substantially all of its employees. The Company makes discretionary contributions to the plan which are allocated to plan participants based on relative compensation. The total number of shares held by the Plan, all of which have been allocated to participant accounts, were 91,386 and 67,499 at December 31, 1997 and 1996. In addition, the Bank made contributions to its ESOP Trust as follows: Years ended December 31 1997 1996 1995 ---- ---- ---- Number of shares issued 7 6 5 ==== ==== ==== Value of stock contributed $237 $195 $180 Cash contributed 19 35 12 ---- ---- ---- Total charged to expense $256 $230 $192 ==== ==== ==== In December 1996, life insurance contracts with a cash surrender value of $5,210,000 were purchased by the Company, the owner the of policies. The purpose of these contracts was to replace a current group life insurance program for executive officers and implement a deferred compensation plan for directors and executive officers in 1996 and to implement a supplemental retirement program in 1997. The cost of providing the benefits to the participants is expected to be offset by the earnings on the life insurance contracts. Page 22 NOTE M - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (dollars in thousands) The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Short-term Investments: For short-term instruments, the carrying amount is a reasonable estimate of fair value. Securities: For securities, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar instruments. Loans: The fair value of fixed rate loans is estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The carrying value of variable rate loans is a reasonable estimate of fair value. The fair market value of commitments is not material at December 31, 1996 or 1995. Deposit Liabilities: The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. Securities Sold Under Agreements to Repurchase and Other Borrowed Funds: For other borrowed funds, rates currently available to the Bank for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. For securities sold under agreements to repurchase, carrying value is a reasonable estimate of fair value. Accrued Interest Receivable and Payable: For accrued interest receivable and payable, the carrying amount is a reasonable estimate of fair value. The estimated fair values of the Company's financial instruments at December 31, are as follows: 1997 1996 ---- ---- Carrying Fair Carrying Fair Value Value Value Value ----- ----- ----- ----- Financial assets: Cash and short-term investments $ 7,909 $ 7,909 $ 8,765 $ 8,765 Securities 72,078 72,594 66,589 66,845 Loans 266,489 266,940 250,964 250,525 Accrued interest receivable 2,503 2,503 2,355 2,355 Financial liabilities: Deposits (293,712) (294,651) (281,825) (283,181) Securities sold under agreements to repurchase (12,831) (12,831) (8,714) (8,714) Other borrowed funds (19,479) (19,479) (17,210) (17,210) Accrued interest payable (2,996) (2,996) (2,345) (2,345) Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgements regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments , and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Page 23 NOTE N - REGULATORY MATTERS The Company and Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgements by regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. At year-end, consolidated actual capital levels (in thousands) and minimum required levels were:
Minimum Required To Be Well Minimum Required Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Regulations ------ ----------------- ------------------ Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- 1997 Total capital (to risk weighted assets) Consolidated $37,177 14.2% $20,901 8.0% $26,126 10.0% Bank $33,619 13.0% $20,693 8.0% $25,867 10.0% Tier 1 capital (to risk weighted assets) Consolidated $33,911 13.0% $10,450 4.0% $15,676 6.0% Bank $26,429 10.2% $10,347 4.0% $15,520 6.0% Tier 1 capital (to average assets) Consolidated $33,911 9.3% $14,577 4.0% $18,222 5.0% Bank $26,429 7.3% $14,422 4.0% $18,027 5.0% 1996 Total capital (to risk weighted assets) Consolidated $33,090 13.8% $19,239 8.0% $24,049 10.0% Bank $30,868 12.9% $19,120 8.0% $23,900 10.0% Tier 1 capital (to risk weighted assets) Consolidated $30,083 12.5% $ 9,620 4.0% $14,429 6.0% Bank $23,880 10.0% $ 9,560 4.0% $14,340 6.0% Tier 1 capital (to average assets) Consolidated $30,083 8.9% $13,517 4.0% $16,897 5.0% Bank $23,880 7.1% $13,418 4.0% $16,773 5.0%
The Company and Bank at year-end 1997 were categorized as well capitalized. Management is not aware of any event or circumstances subsequent to year-end that would change the Company's or Bank's capital structure. Dividends paid by the Bank are the primary source of funds available to the Company for payment of dividends to shareholders and for other working capital needs. The payment of dividends by the subsidiary bank to the Company is subject to restrictions by regulatory authorities. These restrictions generally limit dividends to the current and prior two years retained earnings. At December 31, 1997, approximately $3,680,000 of the Bank's retained earnings were available for dividends under these guidelines. In addition to these restrictions, as a practical matter, dividend payments cannot reduce regulatory capital levels below minimum regulatory guidelines. These restrictions do not presently limit the Company from paying dividends at its historical level. Page 24 NOTE O - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (dollars in thousands) Below is condensed financial information of Ohio Valley Banc Corp. In this information, the parent's investment in subsidiaries is stated at cost plus equity in undistributed earnings of the subsidiaries since acquisition. This information should be read in conjunction with the consolidated financial statements. CONDENSED STATEMENT OF CONDITION at December 31: Assets 1997 1996 ---- ---- Cash and cash equivalents $ 50 $ 50 Investment in subsidiaries 26,952 24,403 Notes receivable - subsidiaries 6,639 4,310 Other assets 1,505 1,664 ------- ------- Total assets $35,146 $30,427 ======= ======= Liabilities Notes Payable $ 875 Other liabilities 105 $ 49 ------- ------- Total liabilities 980 49 ------- ------- Shareholders' Equity Common Stock $ 1,802 $13,183 Surplus 25,930 12,619 Retained Earnings 6,207 4,376 Net unrealized gain on available-for-sale-securities 227 200 ------- ------- Total shareholders' equity 34,166 30,378 ------- ------- Total liabilities and shareholders' equity $35,146 $30,427 ======= ======= CONDENSED STATEMENT OF INCOME Years ended December 31: 1997 1996 1995 ---- ---- ---- Income: Interest on deposits $ 48 $ 12 Interest on loans 70 12 Interest on notes 287 Dividends from bank subsidiary 1,000 6,000 Expenses: Interest on notes 62 Operating expenses 105 87 $ 67 ------ ------ ------ Income before federal income taxes and equity in undistributed earnings of subsidiaries 1,238 5,937 (67) Federal income tax benefit (81) 21 23 Equity in undistributed earnings of subsidiaries 2,523 (2,792) 2,772 ------ ------ ------ Net Income $3,680 $3,166 $2,728 ====== ====== ====== Page 25 NOTE O - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (continued) (dollars in thousands) CONDENSED STATEMENT OF CASH FLOWS Years ended December 31: 1997 1996 1995 ---- ---- ---- Cash flows from operating activities: Net income $3,680 $3,166 $2,728 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries (2,522) 2,792 (2,772) Amortization 12 12 12 Change in other assets (1,256) 21 Change in other liabilities 56 8 ------ ------ ------ Net cash provided by operating activities (30) 5,991 (24) ------ ------ ------ Cash flows from investing activities: Purchase of long-term note from subsidiary (4,000) Change in other short-term investments (875) (300) Change in subsidiary line of credit (1,454) (310) Change in interest-bearing deposits 1,403 (1,645) ------ ------ Net cash used in investing activities (926) (6,255) ------ ------ Cash flows from financing activities: Change in other short-term borrowings 875 Cash dividends paid (1,396) (1,283) (1,194) Cash paid in lieu of fractional shares in stock split (11) (9) (11) Proceeds from issuance of common stock 1,488 1,090 1,132 ------ ------ ------ Net cash used in financing activities 956 (202) (73) ------ ------ ------ Cash and cash equivalents: Change in cash and cash equivalents 0 (466) (97) Cash and cash equivalents at beginning of year 50 516 613 ------ ------ ------ Cash and cash equivalents at end of year $ 50 $ 50 $ 613 ====== ====== ====== Page 26 NOTE P - LOAN CENTRAL CONDENSED FINANCIAL INFORMATION (dollars in thousands) Below is condensed financial information of Loan Central, Inc. This information should be read in conjunction with the consolidated financial statements. CONDENSED STATEMENT OF CONDITION at December 31: 1997 1996 Assets ---- ---- Cash and cash equivalents $ 59 $ 70 Interest-bearing balances with banks 21 Total loans, gross 3,985 2,625 Less: Allowance for loan losses (100) (61) ------- ------- Net loans 3,885 2,564 Premises and equipment 48 54 Other assets 9 18 ------- ------- Total assets $ 4,001 $ 2,727 ======= ======= Liabilities Funds borrowed $ 3,674 $ 2,435 Other liabilities 60 52 ------- ------- Total liabilities 3,734 2,487 ------- ------- Shareholders' Equity Common stock 50 50 Surplus 250 250 Retained earnings (33) (60) ------- ------- Total shareholders' equity 267 240 ------- ------- Total liabilities and shareholders equity $ 4,001 $ 2,727 ======= ======= CONDENSED STATEMENT OF INCOME Years ended December 31: 1997 1996 ---- ---- Interest income Interest on loans $ 627 $ 221 Fees on loans 141 73 Interest on deposits with banks 3 1 ------- ------- Total interest income 768 295 Interest expense Interest on funds borrowed 234 64 ------- ------- Total interest expense 234 64 Net interest income 534 231 Provision for loan losses 154 61 ------- ------- Net interest income after provision for loan losses 380 170 Page 27 NOTE P - LOAN CENTRAL CONDENSED FINANCIAL INFORMATION (continued) (dollars in thousands) Other income Loan insurance income 39 15 Other operating income 9 3 ------- ------- 48 18 Other expense Salaries and employee benefits 207 141 Occupancy expense 44 34 Furniture and equipment expense 15 18 Other operating expense 120 86 ------- ------- 386 279 ------- ------- Income before federal income taxes 42 (91) Federal income taxes 14 (31) ------- ------- NET INCOME $ 28 $ (60) ======= ======= SUMMARIZED QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Quarters Ended 1997 Mar. 31 Jun. 30 Sept. 30 Dec. 31 Total interest income $7,150 $7,518 $7,739 $7,903 Total interest expense 3,298 3,465 3,540 3,599 Net interest income 3,852 4,053 4,199 4,304 Provision for loan losses 300 202 266 477 Net Income 785 909 936 1,050 Net income per share $ .45 $ .51 $ .52 $ .59 1996 Total interest income $6,373 $6,616 $6,893 $7,209 Total interest expense 3,005 2,953 3,075 3,218 Net interest income 3,368 3,663 3,818 3,991 Provision for loan losses 238 281 239 561 Net Income 726 800 840 800 Net income per share $ .42 $ .47 $ .48 $ .46 1995 Total interest income $5,905 $6,253 $6,432 $6,406 Total interest expense 3,002 3,236 3,256 3,169 Net interest income 2,903 3,017 3,176 3,237 Provision for loan losses 75 134 210 195 Net Income 591 637 742 758 Net income per share $ .35 $ .38 $ .44 $ .45 Page 28 REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders Ohio Valley Banc Corp. Gallipolis, Ohio We have audited the accompanying consolidated statements of condition of Ohio Valley Banc Corp., as of December 31, 1997 and 1996 and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ohio Valley Banc Corp. as of December 31, 1997 and 1996 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Crowe, Chizek and Company LLP Columbus, Ohio February 5, 1999 Page 29 SUMMARY OF COMMON STOCK DATA OHIO VALLEY BANC CORP. Years ended December 31, 1997 and 1996 INFORMATION AS TO STOCK PRICES AND DIVIDENDS: The market for the common stock of the Company is not highly active and trading has historically been limited. On February 9, 1996, the Company's common stock was established on NASDAQ securities market under the symbol "OVBC". Prior to this date a limited market was created in the first quarter of 1992 through the Ohio Company. The following table shows bid and ask quotations for the Company's common stock during 1997 and 1996. The range of market price is compiled from data provided by the broker based on limited trading and have been restated for the 33-1/3% stock split in 1997 and the 25% stock split in 1996. The quotations are inter-dealer prices, without retail markup, markdown, or commission, and may not represent actual transactions. 1997 Low Bid High Bid Low Ask High Ask - ---- ------- -------- ------- -------- First Quarter $26.06 $28.32 $27.00 $29.25 Second Quarter 28.32 34.75 29.25 38.75 Third Quarter 34.75 35.50 38.50 39.00 Fourth Quarter 35.00 37.00 37.00 39.00 1996 Low Bid High Bid Low Ask High Ask - ---- ------- -------- ------- -------- First Quarter $21.30 $24.00 $21.90 $27.00 Second Quarter 23.25 25.50 27.00 27.00 Third Quarter 25.13 25.50 27.00 27.00 Fourth Quarter 25.31 26.06 27.00 27.00 Dividends per share 1997 1996 - ------------------- ---- ---- First Quarter $.19 $.18 Second Quarter .20 .18 Third Quarter .20 .19 Fourth Quarter .20 .19 Shown above is a table which reflects the dividends paid per share as restated for the 33-1/3% stock split in 1997 and the 25% stock split in 1996 on the Company's common stock. This disclosure is based on the weighted average number of shares for each year and does not indicate the amount paid on the actual shares outstanding at the end of each quarter. As of December 31, 1997 the number of holders of common stock was 1,299, an increase from 1,144 shareholders at December 31, 1996. Page 30 MANAGEMENT'S DISCUSSION AND ANALYSIS The purpose of this discussion is to provide an analysis of the Company's financial condition and results of operations which is not otherwise apparent from the audited consolidated financial statements included in this report. The accompanying consolidated financial information has been prepared by management in conformity with generally accepted accounting principles and is consistent with that reported in the consolidated statements. Reference should be made to those statements and the selected financial data presented elsewhere in this report for an understanding of the following tables and related discussion. INTRODUCTION Ohio Valley Banc Corp. (the Company), an Ohio corporation with headquarters in Gallipolis, commenced operations on October 23, 1992, and has as its wholly owned subsidiaries, The Ohio Valley Bank Company (the Bank) and Loan Central, Inc., a consumer finance company. Chartered under the banking laws of the state of Ohio, the Bank conducts primarily the same business operations as those often identified with a typical community bank. The Bank's market area is concentrated primarily in Gallia, Jackson, Pike and Franklin counties in Ohio and Mason county, West Virginia. Some additional business originates from the surrounding Ohio counties of Meigs, Vinton, Scioto and Ross. Loan Central provides consumer loans to individuals primarily in Gallia and Lawrence counties in Ohio. Competition for deposits and loans comes primarily from local banks and savings and loan associations, although some competition is also experienced from local credit unions, insurance companies and mutual funds. With the formation of Loan Central, the Company is better able to compete by serving a consumer base which may not meet the Bank's credit standards. During 1997, the Bank opened a new branch in Columbus, Ohio, which provided a new market area. The Bank also converted its loan origination office in Point Pleasant, West Virginia to a full-service branch providing greater access to its current and future customers. The Company expects to continue this growth in 1998 by introducing a second SuperBank branch to be located in a local Wal-Mart store. To expand on Loan Central's success a third office was opened in Jackson, Ohio, in early 1998. RESULTS OF OPERATIONS: SUMMARY 1997 highlights another successful year for shareholders of Ohio Valley Banc Corp with record earnings. Net income advanced $514,000 or 16.2% in 1997 to reach $3,680,000. Net income was up $438,000 or 16.1% in 1996. With these earnings, net income per share increased to $2.07 from $1.83 in 1996, up 13.1%. Fueling the growth in earnings was asset growth of $23,172,000 or 6.8%. Accompanying the growth in assets was the balance sheet's improved efficiency in producing net income. The Company's return on assets (ROA) improved to 1.04% for 1997 which is a continuation from 1996's and 1995's improved ROA of .97% and .85%. The Company's commitment to enhancing shareholder value was demonstrated by the market value of your stock being up over 37% from 1996 which was up 23% from 1995. Additionally, return on equity (ROE) was 11.55% for 1997 compared to 11.08% for 1996 and 10.64% for 1995. Page 31 NET INTEREST INCOME The most significant portion of the Company's revenue, net interest income, results from properly managing the spread between interest income on earning assets and interest expense on the liabilities used to fund those assets. Net interest income is affected by changes in both the average volume and mix of the balance sheet and the level of interest rates for financial instruments. Changes in net interest income are measured by net interest margin and net interest spread. Net interest margin is expressed as net interest income divided by average interest-earning assets. Net interest spread is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities. Both of these are reported on a taxable equivalent basis. Net interest margin is greater than net interest spread due to the interest earned on interest-earning assets funded from noninterest-bearing funding sources, primarily demand deposits and stockholders' equity. Following is a discussion of changes in interest-earning assets, interest-bearing liabilities and the associated impact on interest income and interest expense for the three years ending December 31, 1997. Tables I and II have been prepared to summarize the significant changes outlined in this analysis. Net interest income on a fully tax equivalent basis (FTE) expanded $1,579,000 in 1997, an increase of 10.4% over the $15,144,000 earned in 1996. Net interest income increased 20.6% in 1996 over 1995. For 1997, net interest income growth resulted from an increase in interest-earning assets combined with a higher net interest margin. The increase in 1996 was primarily attributable to the significant increase in the net interest margin along with additional earning assets. Average earning assets grew by 6.3% during 1997 to reach $333,402,000. In 1996, average earning assets grew 2.3% over 1995. Average total loans expanded $22,886,000 or 9.6% from 1996 and represent 78% of earning assets. This compares to average loan growth of 14.9% for 1996 and loans representing 76% of earning assets. Management focuses on generating loan growth as this portion provides the greatest return to the Company. Average securities declined from $89,639,000 in 1995 to $72,184,000 in 1996 to $68,309,000 in 1997. The shift in earning assets to loans from securities was a strategy employed by management to increase the yield on earning assets which resulted in a higher net interest margin. Furthermore, a portion of the maturing securities were allocated to higher yielding life insurance contracts. Although loans comprise a larger percentage of earning assets, management is comfortable with the current level of loans based on collateral values, the increase in the allowance for loan losses and the Company's well-capitalized status. Management does not anticipate to continue the reallocation of securities to loans to the same degree in 1998. Securities have reached an approximate level which management has targeted. With fewer securities being reallocated, the need for traditional funding sources has increased. Average interest-bearing liabilities increased $21,380,000 or 8.1% between 1996 and 1997 compared to a decrease of $1,397,000 between 1995 and 1996. The composition of interest-bearing liabilities continues to shift to time deposits due to the higher rates of interest paid. Average time deposits represented 63.8% of interest-bearing liabilities for 1997, up from 62.1% and 58.1% for 1996 and 1995. The total average balance of NOW accounts, money markets and savings deposits decreased $6,211,000 or 7.5% from 1996 to 1997 and decreased $5,381,000 or 6.1% from 1995 to 1996. The decline in this portion of core deposits has had a negative impact on the cost of funds due to their lower cost. The net interest margin improved .19% to 5.02% in 1997 from 4.83% in 1996. This follows a .73% increase in net interest margin in 1996. Contributing to the improved net interest margin in 1997 was a gain in the net interest spread of .22%. The yield on earning assets rose .45% compared to funding costs increasing only .23%. The yield on interest-earning assets improved with higher relative balances in loans combined with a .39% increase in loan yields to reach 9.95%. In addition, the yield on securities improved to 6.49% from 6.16%. Total funding costs increased in relation to time deposits and borrowed funds comprising a larger percentage of interest-bearing liabilities combined with rate increases. The impact of interest free funds on the net interest margin declined from .75% in 1996 to .72% in 1997. The .03% decrease in the contribution of interest free funding sources combined with the .22% increase in the net interest spread yielded the .19% increase in the net interest margin. The 1996 increase in net interest margin was due to a .64% gain in net interest spread with asset yields rising .51% and funding costs declining .13%. Furthermore, interest free funding sources provided an additional .09%. Management expects the net interest margin to level off in 1998 based on balance sheet mix stabilizing and the Company's minimal exposure to interest rate changes. Page 32 OTHER INCOME AND EXPENSE Total other income, excluding securities losses, increased to $1,860,000 for 1997, a 28.5% gain over 1996. Total other income increased 11.8% from 1995 to 1996. Contributing to 1997's additional income was the earnings from life insurance contracts purchased mostly in the fourth quarter of 1996, which provided an additional $320,000. The purpose of these contracts was to replace a current group life insurance program for executive officers and implement a deferred compensation plan for directors and executive officers in 1996 and to implement a supplemental retirement program in 1997. The cost of providing the benefits to the participants is expected to be offset by the tax preferenced earnings on the life insurance contracts. Within other operating income, gains were recognized from loan service fees and from commissions earned from loan insurance sales. For 1996, total other income increased due to service charges on deposit accounts being up $129,000. Trust division income was down $55,000 in 1996 with the decrease in the trust department's managed assets in the first quarter of 1996. Total other expense increased $1,452,000 or 13.9% in 1997 and $1,318,000 or 14.4% in 1996. The most significant expense in this category is salary and employee benefits. From 1995 to 1997, management staffed three full-service branches for the Bank and two offices for Loan Central. Related to the growth in operations was the increase in the number of full-time equivalent employees from 175 at year-end 1995 to 223 at year-end 1997. Salary and employee benefits increased $926,000 or 14.9% from 1996 to 1997 and increased $833,000 or 15.5% from 1995 to 1996. Associated with the new offices was an increase in occupancy expense and furniture and equipment expense. Increased costs are related to depreciation, rental property costs and utilities. Upgrades of equipment to support growth and processing technology also contributed to the increase. By investing in this technology, data processing expense is down for 1997. The 15.9% gain in other operating expenses over 1996 was related to a supplemental retirement program implemented in 1997 for directors which also will be offset by earnings on life insurance contracts. Additionally, increases were recognized in computer software depreciation. In May 1997 a six member committee was formed and charged with the responsibility of ensuring that the Company will be ready for the Year 2000 transition. This committee has conducted extensive inventories of the Company's computer software and hardware as well as other equipment that may be microchip dependent. The vendors associated with the aforementioned hardware and software were contacted to determine the product's Year 2000 readiness. A Year 2000 plan has been developed which commits the Company to being Year 2000 compliant by December 31, 1998, thereby affording the Company one full year to test all mission critical systems to verify their viability for the Year 2000 and beyond. Management does not believe that the associated costs relating to the Year 2000 effort will materially affect the Company's results of operations, liquidity and capital resources. In an effort to assess and assist the Year 2000 efforts of our customers, the Company sponsored a forum in December of 1997 on Year 2000 date change issues. Page 33 FINANCIAL CONDITION: SECURITIES The second largest component of earning assets is securities. Management's goal in structuring the portfolio is to maintain a prudent level of liquidity while providing an acceptable rate of return without sacrificing asset quality. The portfolio consists primarily of U.S. Treasury notes and U.S. Government agencies which comprise approximately 75% of total securities. As a result, the portfolio's exposure to credit risk is minimal. The weighted average FTE yield on debt securities at year-end 1997 was 6.64% as compared to 6.47% at year-end 1996. Given current reinvestment rates, the yield on securities will be challenged in 1998 as higher yielding securities mature. Table III provides a summary of the portfolio by category and remaining contractual maturity. Issues classified as equity securities have no stated maturity date and are not included in Table III. The portfolio was comprised largely of fixed rate issues and does not contain any issues which would be classified as high risk mortgage-backed securities. The Company classifies a portion of its securities as available-for-sale to provide the flexibility to meet future liquidity needs. At December 31, 1997, the market value of available-for-sale securities totaled $32,659,000 consisting mostly of U.S. Treasury notes. Maturing securities have historically provided sufficient liquidity such that management has not sold a debt security in several years. Within the Company's portfolio are securities which are considered to be structured notes. Structured notes are debt securities other than mortgage-backed securities whose cash flow characteristics depend on one or more indices and/or that have embedded forward, put or call options. As of December 31, 1997, the securities portfolio contained $3,000,000 of structured notes. During 1997, $9,500,000 of the structured notes matured and the remaining structured notes will mature no later than April 1998. The Company's investment policy does not allow any future purchases of structured notes due to the thin trading market for these securities and their greater susceptibility to changes in market value. Page 34 LOANS Total loans increased $15,735,000 or 6.2% in 1997 compared to $37,287,000 or 17.2% in 1996. Residential mortgage loans expanded $8,089,000 or 7.9% in 1997. The Company generally originates real estate loans for its own portfolio, as very few loans are sold on the secondary market. Consumer loans grew $3,932,000 representing a 5.3% gain. A portion of the consumer loans were originated through indirect lending, primarily from area automobile dealers, and are subject to the same underwriting as our regular loans. Commercial loans increased $3,458,000 or 4.6% including commercial equipment leases which are up $464,000. Loan Central accounted for $1,360,000 of the consolidated loan growth for 1997 and has generated a $3,985,000 loan portfolio in less than two years. Tables V, VI, and VII have been provided to enhance the understanding of the loan portfolio and the allowance for potential loan losses. The allowance for loan losses is maintained by management at a level considered adequate to cover possible losses. Management evaluates the adequacy of the allowance for loan losses quarterly based on several factors including, but not limited to, general economic conditions, loan portfolio composition, prior loan loss experience and management's estimate of future probable losses. Actual losses on loans are reflected as reductions in the reserve and are referred to as charge-offs. The amount of the provision for loan losses charged to operating expenses is the amount necessary, in management's opinion, to maintain the allowance for loan losses at an adequate level. The allowance required is primarily a function of the relative quality of the loans in the loan portfolio, the mix of loans in the portfolio and the rate of growth of outstanding loans. The ratio of net charge-offs to average total loans at December 31, 1997 was .40% up from .26% at December 31, 1996 due mostly to higher losses in the consumer loan area. Net charge-offs in both the real estate and commercial loan areas were relatively low, which represents the overall quality of these segments of the loan portfolio. Nonperforming loans, which include nonaccrual loans, and underperforming loans, which include accruing loans past due 90 days or more, are returned to performing status when the loan is brought current and has performed in accordance with contractual terms. Loans past due more than 90 days plus loans placed on nonaccrual status were approximately $4,196,000 or 1.56% of outstanding balances at December 31, 1997 compared to $2,944,000 or 1.16% of outstanding balances at the end of 1996. The increase in both nonperforming and underperforming loans are primarily attributable to loans secured by real estate which are generally well secured. For 1997, provision expense was down $74,000 compared to the provision expense for 1996. The decrease in provision expense was associated with the slower loan growth in 1997, especially in the commercial loan area. In addition, the portfolio continues to contain a large proportion of low risk residential mortgages. As a percentage of total loans, the allowance for loan losses at December 31, 1997 was 1.22% versus 1.21% at December 31, 1996. Management believes the allowance is adequate to absorb inherent losses in the current portfolio and anticipates that it will continue its provision to the allowance for loan losses at its current level for the foreseeable future. Page 35 DEPOSITS Interest-earning assets are funded primarily by core deposits. The accompanying table IV shows the composition of total deposits as of December 31, 1997. Total deposits grew $11,887,000 or 4.2% to reach $293,712,000 at year-end 1997. Leading the growth in deposits was time deposit growth of $9,372,000 followed by growth in noninterest-bearing deposits of $3,008,000. With the expansion in new and current markets, management expects continued growth in deposits in 1998. FUNDS BORROWED In addition to traditional deposits, the Company considers borrowed funds when evaluating funding sources. Other funds borrowed consist of Federal Home Loan Bank (FHLB) advances, securities sold under agreements to repurchase and promissory notes. FHLB advances are subject to collateral agreements and are secured by qualifying first mortgage loans. Management has utilized FHLB advances to fund long-term assets and to fund short-term liquidity needs. At December 31, 1997, the balance of FHLB advances totaled $18,553,000 compared to $15,924,000 at December 31, 1996. Management has determined that the use of FHLB advances is a cost-effective and stable way of generating new money as advance rates are comparable to rates on certificates of deposit. The weighted average rate on FHLB advances during 1997 equaled 5.93%. Management will continue to evaluate borrowings from the FHLB as an alternative funding source. Securities sold under agreements to repurchase increased $4,117,000 from 1996's level of $8,714,000. The approximate weighted average interest rate for repurchase agreements during 1997 was 3.83% which represents a relatively low cost of funds for the Company. Promissory notes are primarily associated with funding loans at Loan Central and were issued with terms of one year or less. CAPITAL RESOURCES The Company maintains a capital level that exceeds regulatory requirements as a margin of safety for its depositors and shareholders. Shareholders' equity totaled $34,166,000 at December 31, 1997, compared to $30,378,000 at December 31, 1996, which represents growth of 12.5%. All of the capital ratios exceeded the regulatory minimum guidelines as identified in Note N "Regulatory Matters". Cash dividends paid of $1,396,000 ($.79 per share) for 1997 represents a 6.8% increase over the cash dividends paid during 1996. The increase in cash dividends paid is due to the additional shares outstanding during 1997 which were not outstanding during 1996 and an increase in dividends paid per share. The Company maintains a dividend reinvestment and stock purchase plan. The plan allows shareholders to purchase additional shares of company stock. A benefit of the plan is to permit the shareholders to reinvest cash dividends as well as make supplemental purchases without the usual payment of brokerage commissions. During 1997, the Company issued 35,422 shares under the dividend reinvestment and stock purchase plan. At December 31, 1997, approximately 62% of the shareholders were enrolled in the dividend reinvestment plan representing approximately 11% of total shares outstanding. Page 36 LIQUIDITY AND INTEREST RATE SENSITIVITY The Company's goal for interest rate sensitivity management is to maintain a balance between steady net interest income growth and the risks associated with interest rate fluctuations. Interest rate risk ("IRR") is the exposure of the Company's financial condition to adverse movements in interest rates. Accepting this risk can be an important source of profitability, but excessive levels of IRR can threaten the Company's earnings and capital. It is management's policy not to position the balance sheet so as to expose the Company to levels of interest rate risk which could significantly impair earnings performance or endanger capital. The Company's asset and liability committee monitors the rate sensitivity of the balance sheet weekly through parameters established by the Board of Directors. The committee uses an interest rate sensitivity gap analysis prepared quarterly to monitor the relationship between the maturity and repricing of its interest-earning assets and interest-bearing liabilities. Interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets and interest-bearing liabilities maturing or repricing within a specified time period. A gap position is considered positive when the amount of interest-sensitive assets exceed the amount of interest-sensitive liabilities, and is considered negative when the amount interest-sensitive liabilities exceed the amount of interest-sensitive assets. Generally, during a period of rising interest rates, a negative gap would adversely affect net interest income, while a positive gap would result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would result in an increase in net interest income, while a positive gap would negatively affect net interest income. This analysis assumes that interest rate changes for interest-earning assets and interest-bearing liabilities are of the same magnitude and velocity, whereas actual interest rate changes generally differ in magnitude and velocity. The Company's exposure to interest rate risk is primarily managed through the selection of the type and repricing characteristics of interest-earning assets and interest-bearing liabilities. Management can influence the Company's gap position by offering fixed or variable rate products, by changing the terms of new loans, investments and time deposits, or by selling existing assets or repaying certain liabilities. The Company's ability to manage its gap position can be challenged by customer preferences which may not meet the Company's goals. The FHLB assists in funding interest-earning assets by providing advances with similar repricing characteristics as many of the loans offered by the Company. Table VIII provides information about the Company's financial instruments that are sensitive to changes in interest rates. The table presents repricing opportunities strictly by maturity date without regard for repricing dates for variable rate products. Noninterest-bearing checking deposits assume an annual decay rate of 12% and savings and interest-bearing checking accounts assume an annual decay rate of 20% based on the Company's historical experience. Prepayments are not included in loan maturities. Page 37 Liquidity management should focus on matching the cash inflows and outflows within the Company's natural market for loans and deposits. This goal is accomplished by maintaining sufficient asset liquidity along with stable core deposits. The primary sources of liquidity are interest-bearing balances with banks, federal funds sold and the maturity and repayment of investments and loans as well as cash flows provided from operations. The Company has classified $32,659,000 in securities as available-for-sale at December 31, 1997. In addition, Federal Home Loan Bank in Cincinnati offers advances to the Bank which further enhances the Bank's ability to meet liquidity demands. The Bank also has the ability to purchase federal funds from several of its correspondent banks. Management does not rely on any single source of liquidity and monitors the level of liquidity based on many factors affecting the Company's financial condition. See statement of cash flows. INFLATION Consolidated financial data included herein has been prepared in accordance with generally accepted accounting principles (GAAP). Presently, GAAP requires the Company to measure financial position and operating results in terms of historical dollars with the exception of securities available-for-sale, which are carried at fair value. Changes in the relative value of money due to inflation or deflation are generally not considered. In management's opinion, changes in interest rates affect the financial institution to a far greater degree than changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not change at the same rate or in the same magnitude as the inflation rate. Rather, interest rate volatility is based on changes in the expected rate of inflation, as well as monetary and fiscal policies. A financial institution's ability to be relatively unaffected by changes in interest rates is a good indicator of its capability to perform in today's volatile economic environment. The Company seeks to insulate itself from interest rate volatility by ensuring that rate sensitive assets and rate sensitive liabilities respond to changes in interest rates in a similar time frame and to a similar degree. FORWARD LOOKING STATEMENTS Except for the historical statements and discussions contained herein, statements contained in this report constitute "forward looking statements' within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934 and as defined in the Private Securities Litigation Reform Act of 1995. Such statements are often, but not always, identified by the use of such words as "believes," "anticipates," "expects," and similar expressions. Such statements involve various important assumptions, risks, uncertainties, and other factors, many of which are beyond our control, that could cause actual results to differ materially from those expressed in such forward looking statements. These factors include, but are not limited to: changes in political, economic or other factors such as inflation rates, recessionary or expansive trends, and taxes; competitive pressures; fluctuations in interest rates; the level of defaults and prepayment on loans made by the Company; unanticipated litigation, claims, or assessments; fluctuations in the cost of obtaining funds to make loans; and regulatory changes. Readers are cautioned not to place undue reliance on such forward looking statements, which speak only as of the date hereof. The Company undertakes no obligation and disclaims any intention to republish revised or updated forward looking statements, whether as a result of new information, unanticipated future events or otherwise. Page 38 CONSOLIDATED AVERAGE BALANCE SHEET & ANALYSIS OF NET INTEREST INCOME
Table I December 31 ------------------------------------------------------------------------------------ 1997 1996 1995 (dollars in thousands) -------------------------- -------------------------- -------------------------- Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate ------- ------- ---- ------- ------- ---- ------- ------- ---- ASSETS - ------ Interest-earning assets: Interest-bearing balances $ 113 $ 5 4.44% $ 60 $ 3 4.67% $ 3,003 $ 183 6.09% with banks Federal funds sold 3,728 202 5.40 2,999 158 5.27 6,575 382 5.81 Securities: Taxable 55,609 3,519 6.33 59,883 3,557 5.94 79,696 4,331 5.43 Tax exempt 12,700 911 7.17 12,301 889 7.23 9,943 742 7.46 Loans 261,252 25,988 9.95 238,366 22,788 9.56 207,447 19,587 9.44 -------- ------- ----- -------- ------- ----- -------- ------- ----- Total interest- earning assets 333,402 30,625 9.19% 313,609 27,395 8.74% 306,664 25,225 8.23% Noninterest-earning assets: Cash and due from banks 7,838 7,355 6,839 Other nonearning assets 16,322 9,168 8,786 Allowance for loan losses (3,169) (2,649) (2,147) -------- -------- -------- Total noninterest- earning assets 20,991 13,874 13,478 Total assets $354,393 $327,483 $320,142 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: NOW accounts $ 31,568 1,048 3.32% $ 32,238 1,091 3.38% $ 31,695 1,211 3.82% Savings and Money Market 44,853 1,064 2.37 50,394 1,202 2.38 56,318 1,412 2.51 Time deposits 181,244 10,436 5.76 163,093 9,194 5.64 153,517 9,149 5.96 Repurchase agreements 11,352 435 3.83 9,813 339 3.46 17,790 597 3.36 Other borrowed money 15,182 919 6.05 7,281 425 5.84 4,896 294 6.00 -------- ------- ----- -------- ------- ----- -------- ------- ----- Total interest- bearing liabilities 284,199 13,902 4.89% 262,819 12,251 4.66% 264,216 12,663 4.79% Noninterest-bearing liabilities: Demand deposit accounts 34,054 32,350 27,212 Other liabilities 4,273 3,746 3,069 -------- -------- ------ Total noninterest- bearing liabilities 38,327 36,096 30,281 Shareholders' equity 31,867 28,568 25,645 -------- -------- Total liabilities and shareholders' equity $354,393 $327,483 $320,142 ======== ======== ======== Net interest earnings $16,723 $15,144 $12,562 ======= ======= ======= Net interest earnings as a percent of interest-earning assets 5.02% 4.83% 4.10% ----- ----- ----- Net interest rate spread 4.30% 4.08% 3.44% ----- ----- ----- Average interest-bearing liabilities to average earning assets 85.24% 83.80% 86.16% ===== ===== =====
Fully taxable equivalent yields are calculated assuming a 34% tax rate, net of nondeductible interest expense. Average balances are computed on an average daily basis. The average balance for available-for-sale securities includes the market value adjustment. However, the calculated yield is based on the securities' amortized cost. Average loan balances include nonaccruing loans. Loan income includes cash received on nonaccruing loans. Page 39 RATE VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME & EXPENSE
Table II 1997 1996 ----------------------------- ---------------------------- (dollars in thousands) Increase (Decrease) Increase (Decrease) From Previous Year Due to From Previous Year Due to ----------------------------- ---------------------------- Volume Yield/Rate Total Volume Yield/Rate Total ------ ---------- ----- ------ ---------- ----- INTEREST INCOME - --------------- Interest-bearing balances with banks $ 2 $ 2 $ (146) $ (34) $ (180) Federal funds sold 40 $ 4 44 (191) (33) (224) Securities: Taxable (263) 225 (38) (1,150) 376 (774) Tax exempt 29 (7) 22 171 (24) 147 Loans 2,249 951 3,200 2,953 248 3,201 ------- ------- ------- ------- ------- ------- Total interest income 2,057 1,173 3,230 1,637 533 2,170 INTEREST EXPENSE - ---------------- NOW accounts (22) (21) (43) 21 (141) (120) Savings and Money Market (132) (6) (138) (143) (67) (210) Time deposits 1,042 200 1,242 554 (509) 45 Repurchase agreements 57 39 96 (275) 17 (258) Other borrowed money 478 16 494 139 (8) 131 ------- ------- ------- ------- ------- ------- Total interest expense 1,423 228 1,651 296 (708) 412 ------- ------- ------- ------- ------- ------- Net interest earnings $ 634 $ 945 $ 1,579 $ 1,341 $ 1,241 $ 2,582 ======= ======= ======= ======= ======= =======
The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. Fully taxable equivalent assuming 34% tax rate, net of related nondeductible interest expense. Page 40 SECURITIES
Table III MATURING --------------------------------------------------------------------------- As of December 31, 1997 Within After One but After Five but (dollars in thousands) One Year Within Five Years Within Ten Years After Ten Years -------- ----------------- ---------------- --------------- Amount Yield Amount Yield Amount Yield Amount Yield ------ ----- ------ ----- ------ ----- ------ ----- U.S. Treasury securities $ 9,306 6.80% $18,140 6.61% Obligations of U.S. Government agency securities 8,491 5.96% 18,080 6.18% Obligations of states and political subdivisions 1,934 7.13% 5,363 7.12% $5,768 7.97% $ 870 8.61% Corporate Obligations 503 6.95% Mortgage-backed securities 39 6.71% 433 6.15% ------- ---- ------- ---- ------ ---- ------ ---- Total debt securiities $20,234 6.48% $41,622 6.49% $6,201 7.84% $ 870 8.61% ======= ==== ======= ==== ====== ==== ====== ====
Tax equivalent adjustments have been made in calculating yields on obligations of states and political subdivisions using a 34% rate. Weighted average yields are calculated on the basis of the cost and effective yields weighted for the scheduled maturity of each security. Mortgage-backed securities, which have prepayment provisions, are assigned to a maturity based on estimated average lives. Securities are shown at their carrying values which include the market value adustments for available-for-sale securities. DEPOSITS Table IV as of December 31 (dollars in thousands) 1997 1996 1995 ---- ---- ---- Interest-bearing deposits: NOW accounts $ 29,439 $ 28,493 $ 29,896 Money Market 13,130 13,470 18,524 Savings accounts 31,142 32,242 35,167 IRA accounts 28,102 28,044 29,210 Certificates of Deposit 154,799 145,485 126,272 -------- -------- -------- 256,612 247,734 239,069 Noninterest-bearing deposits: Demand deposits 37,100 34,091 33,300 -------- -------- -------- Total deposits $293,712 $281,825 $272,369 ======== ======== ======== Page 41 ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES Table V Years Ended December 31 (dollars in thousands) 1997 1996 1995 1994 1993 - ---------------------- ---- ---- ---- ---- ---- Commercial loans $ 879 $ 887 $ 328 $ 628 $ 475 Percentage of loans to total loans 29.91% 30.30% 21.03% 24.63% 25.61% Real estate loans 118 238 236 136 257 Percentage of loans to total loans 40.87% 40.21% 48.16% 47.58% 44.91% Consumer loans 949 799 597 544 579 Percentage of loans to total loans 29.22% 29.49% 30.81% 27.79% 29.48% Unallocated 1,344 1,156 1,228 876 702 ------- ------- ------- ------- ------- Allowance for Loan Losses $3,290 $3,080 $2,389 $2,184 $2,013 ======= ======= ======= ======= ======= 100.00% 100.00% 100.00% 100.00% 100.00% ======= ======= ======= ======= ======= Ratio of net charge-offs to average loans .40% .26% .20% .12% .37% ======= ======= ======= ======= ======= The above allocation is based on estimates and subjective judgements and is not necessarily indicative of the specific amounts or loan categories in which losses may ultimately occur. SUMMARY OF NONPERFORMING AND PAST DUE LOANS Table VI (dollars in thousands) 1997 1996 1995 1994 1993 - ---------------------- ---- ---- ---- ---- ---- Impaired loans $ 430 $ 449 $ 579 Past due-90 days or more and still accruing $2,724 $1,677 Nonaccrual 473 394 Accruing loans past due 90 days or more to total loans 1.36% .91% Nonaccrual loans as a % of total loans .24% .21% Impaired loans as a % of total loans .16% .18% .27% Allowance for loans losses as a % of total loans 1.22% 1.21% 1.10% 1.09% 1.09% Management believes that the impaired loan disclosures are comparable to the nonperforming loan disclosures except that the impaired loan disclosures do not include single family residential or consumer loans which are analyzed in the aggregate for loan impairment purposes. During 1997, the Company did not recognize any interest income on impaired loans. Loans not included above that management feels have loss potential total approximately $200,000. The Company has no assets which are considered to be troubled debt restructurings. Management formally considers placing a loan on nonaccrual status when collection of principal or interest has become doubtful. Furthermore, a loan should not be returned to the accrual status unless either all delinquent principal or interest has been brought current or the loan becomes well secured and is in the process of collection. MATURITY AND REPRICING DATA OF LOANS
Table VII As of December 31, 1997 Maturing/Repricing (dollars in thousands) Within After One but One Year Within Five Years After Five Years Total -------- ----------------- ---------------- ----- Commercial loans and other $ 58,558 $ 8,257 $13,877 $ 80,692 Real estate loans 54,322 25,654 30,271 110,247 Consumer loans 23,237 46,369 9,234 78,840 -------- ------- ------- -------- Total loans $136,117 $80,280 $53,382 $269,779 ======== ======= ======= ========
Loans maturing and loans repricing after one year with: Variable interest rates $ 31,338 Fixed interest rates 102,324 -------- Total $133,662 ======== Page 42 RATE SENSITIVITY ANALYSIS
Table VIII (dollars in thousands) As of December 31, 1997 Principal Amount Maturing in: There- Fair Value 1998 1999 2000 2001 2002 after Total 12/31/97 Rate-Sensitive Assets: Fixed interest rate loans $ 5,968 $ 7,170 $ 13,051 $ 19,023 $ 13,035 $ 49,717 $107,964 $108,415 Average interest rate 9.41% 11.62% 11.72% 11.11% 10.83% 9.23% 10.23% Variable interest rate loans $ 40,553 $ 1,291 $ 3,363 $ 7,038 $ 9,670 $ 99,900 $161,815 $161,815 Average interest rate 10.38% 9.84% 10.35% 9.87% 9.34% 8.41% 9.08% Fixed interest rate securities $ 20,194 $ 10,689 $ 10,239 $ 10,034 $ 10,274 $ 10,304 $ 71,734 $ 72,594 Average interest rate 6.48% 6.83% 6.42% 6.33% 6.34% 7.61% 6.64% Other interest-bearing assets $ 197 $ 197 Average interest rate 4.49% Rate-Sensitive Liabilities: Noninterest-bearing checking $ 4,452 $ 3,918 $ 3,448 $ 3,034 $ 2,670 $ 19,578 $ 37,100 $ 37,100 Savings & Interest-bearing checking $ 11,259 $ 9,230 $ 7,605 $ 6,300 $ 5,246 $ 34,071 $ 73,711 $ 73,711 Average interest rate 2.57% 2.59% 2.61% 2.63% 2.65% 2.84% 2.71% Time deposits $133,554 $ 33,380 $ 8,060 $ 2,902 $ 3,670 $ 1,335 $182,901 $183,840 Average interest rate 5.73% 5.83% 6.01% 5.96% 6.54% 7.45% 5.79% Fixed interest rate borrowings $ 12,807 $ 1,500 $ 1,957 $ 51 $ 16,315 $ 16,315 Average interest rate 5.99% 6.08% 5.99% 7.00% 6.00% Variable interest rate borrowings $ 15,995 $ 15,995 $ 15,995 Average interest rate 4.34% 4.34%
KEY RATIOS Table IX 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Return on average assets 1.04% .97% .85% .80% .70% Return on average equity 11.55% 11.08% 10.64% 10.51% 9.62% Dividend payout ratio 37.94% 40.51% 43.77% 45.17% 50.31% Average equity to average assets 8.99% 8.72% 8.01% 7.62% 7.28% Page 43 DIRECTORS OHIO VALLEY BANC CORP Keith Brandeberry W. Lowell Call Physician Vice President of Sausage Production Bob Evans Farms, Inc. James L. Dailey Robert H. Eastman Chairman and Chief Executive Officer President Ohio Valley Banc Corp Ohio Valley Supermarkets, Inc. Merrill L. Evans Morris E. Haskins Farmer Retired Bank Executive President, Evans Enterprises, Inc. Warren F. Sheets Jeffrey E. Smith Attorney President and Chief Operating Officer Ohio Valley Banc Corp Thomas E. Wiseman President, The Wiseman Agency, Inc. DIRECTORS OHIO VALLEY BANK COMPANY Phil A. Bowman Keith R. Brandeberry Vice President Member Executive Committee Waterloo Coal Co., Inc. Chairman Examination and Member Examination and Audit Committee Audit Committee W. Lowell Call James L. Dailey Member Examination and Chairman and Audit Committee Chief Executive Officer The Ohio Valley Bank Company Chairman Executive Committee Robert H. Eastman Merrill L. Evans Chairman Marketing and Member Executive Committee Long Range Planning Committee Member Marketing and Long Range Planning Committee Lloyd R. Francis Art E. Hartley, Sr. Developer Chairman of the Board Member Marketing and Long City Ice and Fuel, Inc. Range Planning Committee Member Marketing and Long Range Planning Committee Morris E. Haskins Charles C. Lanham Member Executive Committee Executive Vice President Member Trust Committee The Ohio Valley Bank Company Member Executive Committee Member Trust Committee Frank H. Mills, Jr. Warren F. Sheets Farmer Chairman Trust Committee Member Examination and Audit Committee Jeffrey E. Smith Lannes C. Williamson President and PresidentMember Chief Operating Officer L. Williamson Pallets, Inc. The Ohio Valley Bank Company Member Examination and Member Executive Committee Audit Committee Member Marketing and Long Range Planning Committee Thomas E. Wiseman Member Executive Committee Member Trust Committee DIRECTOR EMERITUS C. Leon Saunders Retired Bank Executive Page 44 OFFICERS OHIO VALLEY BANC CORP James L. Dailey Jeffrey E. Smith Chairman and President, Chief Operating Officer Chief Executive Officer and Treasurer Charles C. Lanham Wendell B. Thomas Senior Vice President Vice President and Secretary Sue Ann Bostic Michael D. Francis Vice President Vice President Katrinka V. Hart Mario P. Liberatore Vice President Vice President E. Richard Mahan Larry E. Miller, II Vice President Vice President Cindy H. Johnston Paula W. Salisbury Assistant Secretary Assistant Secretary OFFICERS LOAN CENTRAL Jeffrey E. Smith Michael D. Francis President Senior Vice President Cherie A. Barr Secretary WEST VIRGINIA ADVISORY BOARD Anna P. Barnitz Richard L. Handley Business Manager/Treasurer Educator Bob's Market and Greenhouses, Inc. Mason County Board of Education Art E. Hartley, Sr. Gregory K. Hartley President City Ice and Fuel, Inc. Charles C. Lanham Mario P. Liberatore Chairman John C. Musgrave Trenton M. Stover West Virginia Lottery Director CPA/Owner Trenton Stover CPA Lannes C. Williamson R. Raymond Yauger President Yauger Farm Supply, Inc. Page 45 OFFICERS OHIO VALLEY BANK COMPANY James L. Dailey Jeffrey E. Smith Chairman and President and Chief Executive Officer Chief Operating Officer Charles C. Lanham Wendell B. Thomas Executive Vice President Senior Vice President and Secretary Member Executive Committee Sue Ann Bostic Katrinka V. Hart Senior Vice President Senior Vice President Administrative Services Group Retail Bank Group Member Marketing and Long Range Planning Committee Mario P. Liberatore E. Richard Mahan Senior Vice President Senior Vice President West Virginia Bank Group Commecial Bank Group Member Trust Committee Larry E. Miller, II Patricia L. Davis Senior Vice President Vice President Financial Bank Group Management Information Secretary Examination and Systems Audit Committee Bryan W. Martin Richard D. Scott Vice President Vice President, Trust Facilities and Technical Secretary Trust Committee Services David L. Shaffer Tom R. Shepherd Vice President Vice President, Marketing Retail Lending Member Marketing and Long Range Planning Committee Sandra L. Edwards Hugh H. Graham, Jr. Assistant Vice President Assistant Vice President Operations Center Manager Retail Expansion and Acquisitions Robert T. Hennesy Larry E. Lee Assistant Vice President Assistant Vice President Retail Indirect Lending Manager Cash Services and Security Jennifer L. Osborne Patrick H. Tackett Assistant Vice President Assistant Vice President Retail Lending Operations Manager Retail Direct Lending Manager Molly K. Tarbett Phyllis P. Wilcoxon Assistant Vice President Assistant Vice President for Deposit Operations Manager Shareholder Relations Darren R. Blake Michael C. Davis Assistant Cashier Assistant Cashier Research and Development for MIS Loan Officer Judy K. Hall Brenda G. Henson Assistant Cashier Assistant Cashier Manger, Training and Manager Customer Service Educational Development N. Kathryn Massie Billy J. Meadows Assistant Cashier Assistant Cashier Telemarketing and Golden Opportunities Program Quality Control Linda L. Plymale Scott W. Shockey Assistant Cashier Assistant Cashier Operations Center Regulatory Reporting Manager Timothy V. Stevens Rick A. Swain Assistant Cashier Assistant Cashier Retail Development Region Manager Pike County Cindy H. Johnston Paula Salisbury Assistant Secretary Assistant Secretary Page 46 EX-21 6 SUBSIDIARIES OF THE REGISTRANT SUBSIDIARIES OF THE REGISTRANT STATE OF PERCENTAGE NAME INCORPORATION OF OWNERSHIP ---- ------------- ------------ The Ohio Valley Bank Company Ohio 100% Loan Central, Inc. Ohio 100% EX-23 7 CONSENT OF INDEPENDENT ACCOUNTANTS CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-3 (No. 33-62010) of Ohio Valley Banc Corp. of our report dated February 5, 1998 on the 1997 financial statements of Ohio Valley Banc Corp., which report is incorporated by reference in this Form 10-K. Crowe, Chizek and Company LLP Columbus, Ohio March 30, 1998 EX-27 8 12/31/97 FINANCIALS
9 1,000 12-MOS DEC-31-1997 DEC-31-1997 7,712 103 94 0 32,659 39,419 39,935 269,779 3,290 364,095 293,712 28,853 3,907 3,457 0 0 1,802 32,364 364,095 25,949 4,154 207 30,310 12,548 13,902 16,408 1,245 0 11,920 5,103 5,103 0 0 3,680 2.07 2.07 5.02 1,019 3,177 0 200 3,080 1,215 180 3,290 1,946 0 1,344 In April 1997, the Board of Directors declared a 33-1/3% stock split effective April 21, 1997, and prior Financial Data Schedules have not been restated for the recapitalization.
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